Latest Sell-off Could Mean Treasuries Are on the Rise

Rising Treasury yields continue to push the prospect of rate cuts farther out into the year. However, a recent pullback might be an early sign that Treasuries could be rising, which should clear the pathway for bullish opportunities in leveraged exchange-traded funds (ETFs).

Investor behavior may already be reflecting bullishness after the two-year Treasury yield reached the 5% yield mark. Rate cut expectations could continue to hinge on the two-year yield as an indicator of where interest rates may head in the near term. If that’s the case, capital markets are hoping 5% is the ceiling.

“There’s already a strong indication that investors want to buy after yields surged this month on signs of a resilient economy, which led traders to push out bets on Fed interest-rate cuts to late 2024,” a Bloomberg report published on Yahoo Finance noted. “The latest leg of the Treasuries selloff briefly pushed the two-year rate above 5% after Fed Chair Jerome Powell signaled last week that the central bank is in no hurry to ease policy.”

Along with the two-year yield, other Treasury yield indicators have risen on the prospect that rate cuts won’t happen anytime soon. The Cboe Treasury yield indexes in the five- and 30-year term have both been climbing this year.

“A Fed that sticks to their guns and says, ‘We are going to break inflation,’ means there’s a top in yields,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “Yields will spike higher if the Fed backs off too soon and cuts.”

According to the report, the two-year Treasury yield fell below 4.15% in January, which was largely driven by the expectations of rate cuts coming in the first quarter. Of course, that bet never came to fruition.

^FVX Chart

^FVX data by YCharts

Treasuries Bottoming Out?

If that 5% two-year Treasury yield continues to retreat, more investors could pull the trigger on adding bonds. The increased demand will help spur bullish options in leveraged ETFs like 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.

For more news, information, and analysis, visit the Leveraged & Inverse Channel.