If Yields Continue Ticking Higher, Keep This ETF in the Toolbox

U.S. Federal Reserve rate decisions are typically a wait-and-see affair where it takes time for the markets to fully digest the Fed’s comments. In this case, the capital markets were already expecting a hike of 25 basis points, but what the future holds is still murky.

“Interest-rate forecasts from Federal Reserve officials sparked a mixed reaction from U.S. bond markets Wednesday, suggesting that investors still have questions on how much the central bank will actually tighten monetary policy,” the Wall Street Journal reports.

“Selling in short-term Treasurys indicated that investors were once again lifting their expectations for how high interest rates could rise this year,” the report adds further. “Initial selling in longer-term bonds quickly fizzled, however, in a sign that investors thought that a fast pace of interest-rate increases over the next several months could lead to fewer increases later.”

Getting Bearish on Intermediate Treasuries

With yields rising as a result of a bond sell-off, traders can look to inverse funds for potential gains. One such fund is the Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO), which is up 15% so far in 2022.

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. The index 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.

Should rates continue to climb, that could sour the taste for bonds ahead. Inflationary pressures are at the top of investors’ minds at the moment, which could push yields higher.

“The Fed sent a strong signal to the market that it has the commitment and willpower to cool inflationary pressures,” said Gary Pollack, head of fixed income trading at Deutsche Bank’s private wealth-management unit.

TYO Chart

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