Banks are relatively firm on the expectation that interest rates will fall in 2024, giving the bond market plenty of optimism heading into the new year. Bullish prospects for a bond rally should spark opportunities for traders in leveraged exchange-traded funds (ETFs) regardless of whether bond prices head up or down
“When banks began sending out their annual forecasts to clients a month ago, they were broadly united in the view that government bonds would rally next year as interest rates start to fall,” reported the Financial Times. “But many forecasts have already been met more than a year early, as bigger than expected falls in inflation and a changed outlook from the US Federal Reserve have persuaded investors to bring forward their bets on rate cuts.”
That said, the capital markets will continue to hang on the Fed’s word when it comes to interest rate policy moves in 2024. That should bring plenty of market volatility, which should benefit traders who strategize on bond prices irrespective of whether they rise or fall.
“It’s been a very quick move in rates, because the Fed has made a very quick pivot,” said Bank of America rates strategist Meghan Swiber. “It just speaks to how volatile the market has been — and how very conditional it is on our understanding of how the Fed will move.”
4 ETFs When Bonds Rise or Fall
When bond prices rise, specifically when it comes to Treasury notes, bullish options include the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF) and the Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD). Both of these funds offer triple leverage, giving traders the opportunity to maximize their profits, but only seasoned traders should consider these funds. TMF seeks daily investment results of 300% of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index, while TYD seeks 300% of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index.
The Fed backing off interest rate hikes is never a 100% certainty, but should they pivot and bond prices fall, traders can also take the other side with inverse ETFs. Bearish bond traders can use the Direxion Daily 20+ Yr Trsy Bear 3X ETF (TMV) and the Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO) — both funds take the other side of TMF and TYD, which makes them ideal when bond prices take a dip.
The rise of TMF and TYD the past few months, 41% and 18%, respectively, highlights the expectation that rates will fall and thus push bond prices higher. Of course, traders can also use TMV and TYO as tactical hedges should the Fed pivot unexpectedly from their rate-cutting agenda.
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