Bearish bond ETFs are on the move higher as the Federal Reserve signals interest rate hikes for the year, with the capital markets looking at possibly five.
As inflation pushes higher and the Fed gets more hawkish, yields are also rising. In a recent statement, the Fed acknowledged the strength of the economy as it looks to wind down its bond purchases and obviously raise rates.
“Indicators of economic activity and employment have continued to strengthen,” a Fed press release states. “The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in COVID-19 cases.
“Job gains have been solid in recent months, and the unemployment rate has declined substantially,” the press release says further. “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”
A Pair of Bearish Bond Plays
The Fed’s move to raise rates could feed into higher yields, which move conversely with bond prices. As such, one place to start is on the shorter end of the yield curve with the Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO). TYO seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index, which is a market value-weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than seven years and less than or equal to 10 years.
On the longer end of the yield curve, there’s the Direxion Daily 20+ Yr Trsy Bear 3X ETF (TMV). TMV seeks daily investment results equal to 300% of the inverse of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index.
TMV invests in swap agreements, futures contracts, short positions, or other financial instruments that provide inverse or short leveraged exposure to the index, which is a market value-weighted index that includes publicly issued U.S. Treasury debt securities that have a remaining maturity of greater than 20 years.
Both funds are up to start the year, with TYO up 6% while TMV is up 9%. If this trend persists, traders can continue to scalp profits from both funds until they reverse course.
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