May’s inflation data could bring Treasury bulls back into the fray. If the Fed has the signal they need to start easing monetary policy, then it could bring up the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF) and the Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD).
Of course, it’s a big “if” when it comes to the data-dependent Fed. There were calls to decrease interest rates in July, but Fed Chair Jerome Powell pushed back against that notion. That might sound great to yield-focused investors, but not so much for those betting on bond prices increasing.
Summer Markets
In the meantime, tariffs fears and geopolitical tensions continue to instill a sense of market unease though the S&P 500 has largely recovered from its April sell-off. Still, the words “cautious optimism” continue to permeate through the markets, creating a need for the safety of Treasuries. Or at least that’s what it should do.
A recent Moody’s downgrade may have investors reconsidering Treasuries as the prime safe haven, especially with other assets like gold rising. In this higher-for-longer interest rate environment, yield continues to be the motivator for bond exposure, which conversely applies downward pressure on bond prices.
That could change in bond prices’ favor, especially for Treasuries if rate cuts occur. Tamer inflation during the month of May could help spur this hope, and market experts backing a rate cut now have more reason to expect that will be the case.
“It’s a clean downside surprise and not just in the headline. The breadth of the softening gives the Fed real cover,” said Haris Khurshid, chief investment officer at Chicago-based Karobaar Capital. “One cut is back in play, no question.”
TMF and TYD in the meantime have been feeling the brunt of lower bond prices. The delay of rate cuts is especially hitting TMF as investors expect easing to happen later rather than sooner. If news of a rate cut hits, traders can use TMF and TYD to trade the news. Or, if their conviction is high for a forthcoming cut, the 3x exposure can maximize the profitability of a correct call. TMF seeks daily investment results equal to 300% of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. TYD does the same, but with the short-term ICE U.S. Treasury 7-10 Year Bond Index.
Be Ready With Inverse ETFs
Prognosticating on what the Fed may or may not do gives way to another question: how will the markets react? When the Fed zigs and the market zags, traders should be able to react as necessary to ensure their capital is protected and profitability opportunities are maximized. This is were having inverse ETFs at the ready help with being flexible in any market.
If Treasuries all of a sudden sell off, traders can take the other side of TMF and TYD. This is available in the Direxion Daily 20+ Yr Trsy Bear 3X ETF (TMV) and the Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO). Like their bullish counterparts, these funds also have triple leverage so only seasoned market players should use these products as appropriate.
Again, this allows traders to stay flexible in times of heavy volatility. Traders can use inverse funds to hedge a current position or to simply react to selling pressure, thereby profiting from a selloff. Bonds might not seem as dynamic as stocks, but they’re not immune to volatility as April revealed. Again, having flexibility is key.
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