The start of 2024 has been marked by record issuance in bonds both in the public and private sectors. But as fresh supply hits the bond market, prices have been dipping as of late. Of course, this benefits inverse exchange-traded funds (ETFs) that can take advantage of the dips in prices.
“New reports suggest investors have grabbed hold of bonds at an unprecedented rate, but indications suggest their hunger for this debt has limits,” a Mortgage Professional America report noted.
“Across the board, bond prices have dipped by approximately one cent per dollar this month on average, influenced by the hefty $720 billion in fixed-income securities that companies and governments have put up for sale,” the report added.
As the report mentioned, it could simply be a case of demand needing to catch up with supply. Another catalyst for potential bond price increases will be when the Federal Reserve actually implements rate cuts. The central bank recently decided to once again leave rates as is, testing the patience of capital markets that already priced in rate cuts last year.
In the meantime, it could be a waiting game for rate cuts, which should provide the impactful market mover for equities to keep pushing higher. Likewise, the bond market can benefit when yields come down. Bond prices would then head higher, as both move inversely with one another.
2 Ways to Play the Bond Price Dip
Right now, the Fed is content to be steady and measured before considering a rate cut. Economic data will continue to be the determinant of when rate cuts happen and the pace in which they come. For those expecting swift rate cuts throughout the year, that may be a bit far-fetched from reality.
“Inflation is still too high. Ongoing progress in bringing it down is not assured,” said Fed Chairman Jerome Powell, reiterating that rate cuts can’t happen until data confirms “greater confidence that inflation is moving.”
That said, if bond prices continue to push lower, 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). TMV seeks daily investment results of 300% of the inverse daily performance of the ICE U.S. Treasury 20+ Year Bond Index, while TYD seeks 300% of the inverse daily performance of the ICE U.S. Treasury 7-10 Year Bond Index.
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