For the first six months of 2024, the Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD) was trending lower. That’s because he higher-for-longer interest rates narrative was pushing bond prices lower. Now the trend is starting to reverse course as more volatility enters the equity market.
With a presidential election forthcoming, it was expected that volatility could happen closer to the end of the year. However, renewed recession fears after cooler-than-expected employment numbers during the month of July added a heavy dose of market fluctuations in what’s typically a sedate summer for the stock market.
In the bond market, yield has been the primary motivator regarding seeking debt as a fixed income option. Now, investors have become more wary of market movements amid the current economic backdrop. So they’re moving back to bonds as a hedge against stock market declines.
Using bonds as a hedge is a move back to fundamentals after the 2022 bear market saw stocks and bonds head downward as the Fed aggressively hiked rates to keep up with inflation. History shows that adding bonds to a portfolio can help investors protect against market shocks like what happened in the beginning of August.
“The average down year for the U.S. stock market is a loss of almost 14%,” wrote Ben Carlson in a Wealth of Common Sense blog. “In those same down years, Treasuries have averaged a gain of more than 4%. And that number includes the downright awful year that was 2022.”
TYD for Short-Term Price Gains
While TYD isn’t a tool for long-term investing in bullish bond prices, it can be used as a tactical tool for short-term price spikes. Its year-to-date chart shows a V-shaped recovery that began just before the start of summer.
When the performance of TYD is viewed from a past-three-month time frame, the fund is up almost 12%. The safe haven scramble at the start of August was apparent as the fund spiked higher. As interest rate cuts loom, the trend could continue upward.
TYD seeks 300% of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index, allowing traders to amplify price gains. This could be forthcoming as rate cuts occur and yields subsequently fall, pushing bond prices higher. Furthermore, the migration to bonds amid renewed recession fears could provide a further catalyst.
“If we are in a situation where the economy is slowing, disinflation (or even deflation) is the current trend and we finally go into a recession at some point, high-quality bonds will likely provide diversification benefits,” Carlson added.
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