Hedging & Trading Bond ETFs in a Rising Rate Environment

“The growing pace of rate increases is particularly important to bond traders who, as interest rates rise, will see a decrease in yield and subsequent sale value of corporate and treasury bonds,” according to a Direxion note. “As rates have been at all-time lows since the 2008 financial crisis, the bond market has experienced volatility in recent months in response to both rising rates as well as the increased value of securities that thrive on economic and market growth like stocks.”

With the markets keeping a close watch on Fed movements, particularly the FOMC meetings, bond ETF traders have tried to hedge risks or capitalize on market turns through leveraged and inverse Treasury bond ETFs.

For example, the Direxion Daily 7-10 Year Treasury Bull 3x Shares ETF (NYSEArca: TYD) and Direxion 7-10 year Treasury Bear 3x (NYSEArca: TYO) helped provide a long and short leveraged 300% daily stance on Treasury debt securities with seven to 10 year maturity.

Similarly, the Direxion Daily 20+ Year Treasury Bull 3x Shares ETF (NYSEArca: TMF) and Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEArca: TMV), which tracks the 300% long and short daily performance of the NYSE 20 Year Plus Treasury Bond Index, respectively, have been popular ways to more aggressive exposure to the turns in the Treasury market.

Less aggressive fixed-income investors may also hedge against the Federal Reserve interest rate hike through simple inverse or short Treasury bond ETFs, such as the Direxion Daily 7-10 Year Treasury Bear 1x Shares (NYSEArca: TYNS) or Direxion Daily 20+ Year Treasury Bear 1x Shares (NYSEArca: TYBS).

“While the current ecosystem of rising interest rates and steady economic activity may make bonds less appealing to some investors, rising rates mean that, long-term, bond yields will tend to rise,” according to Direxion. “That may not mean much in the short-term interest rate environment, but tactical managers should consider those yields when weighing the role of bonds in their own portfolios.”