Bets on fewer rate hikes are increasing, which is providing the headwinds for bonds to push higher. However, a heating economy could add some hawkishness to the U.S. Federal Reserve, which could stifle further upside in rising Treasury bills.
“A bond market that wants to rally is anxiously waiting in the wings for the Federal Reserve to give it the green light next week as a robust economy keeps upending bullish positions,” a Bloomberg report said.
Nonetheless, investors are still optimistic that slowing inflation numbers in June will carry on through the rest of the year. As such, yields have been falling and subsequently, prices rising.
“Treasuries have surged in recent weeks, sending yields on policy-sensitive two-year notes down nearly 30 basis points from this year’s peak of 5.12% reached on July 6, as signs of slowing inflation boost bets policymakers are nearing the end of their most aggressive hiking cycle in decades,” the report added.
4 Options to Trade the Fluctuating Treasury Bonds
More upside for Treasury notes could be ahead as the Fed unwinds its tight monetary policy. When bond prices rise, specifically 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 funds offer triple leverage, giving traders the opportunity to maximize their profits, but as such, 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.
On the other end of the spectrum, the loosening of monetary policy could be a slow drip as opposed to a downpour. Inflation is proving to be more stubborn than originally anticipated while the early signs of cooling inflation are promising.
“While things seem to be heading in the right direction with inflation, we are only at the start of a long process,” said Karen Dynan, an economist at Harvard University, in a Wall Street Journal report.
Given this, a Fed that won’t take its foot off the interest rate accelerator can apply further downward pressure on bonds. This fits right into the hands of bearish bond traders with leveraged ETFs like 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.
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