It’s good to be a bear lately when it comes to the rising tide of benchmark Treasury yields. The increase is feeding into inverse trading profits with funds like the Direxion Daily 20+ Yr Trsy Bear 3X ETF (TMV).
While the Federal Reserve may be trying to keep rates at bay, the long-term prospect of rising rates is still in the back of the capital markets’ minds. In the last trading session, yields crept higher following the Fed declining to extend a rule that would allow banks to hold less capital against Treasuries and other holdings.
“The 10-year U.S. Treasury yield hovered around its 14-month high on Friday after the Federal Reserve on Friday declined to extend a rule expiring at the end of the month that relaxed the supplementary leverage ratio for banks during the pandemic,” a CNBC article reported. “The yield on the benchmark 10-year Treasury note rose to 1.732% at around 4:30 p.m. ET. The yield on the 30-year Treasury bond rose to 2.451%. Yields move inversely to prices.”
TMV seeks daily investment results before fees and expenses of 300% of the inverse of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. TMV invests in swap agreements, futures contracts, short positions, or other financial instruments that provide inverse or short leveraged exposure to the index, which is a market value weighted index that includes publicly issued U.S. Treasury debt securities that have a remaining maturity of greater than 20 years.
So far in 2021, TMV is up 54%.
Betting On Long-Term Inflation Prospects
TMV can be used as a trader’s tool to bet on the long-term inflationary environment. Right now, investors are cognizant that in a healing economy, rates will eventually have to push higher.
Fed Chair Jerome Powell recently said that if the economic environment warrants a rise in rates, then the appropriate adjustment in policy will follow. In the past couple of weeks, inflation fears sparked have sparked equities sell-offs.
“Reactions indicate that markets either see longer-term risks to inflation, or near-term risks of the Fed wavering from this new approach,” said Gary Pzegeo, head of fixed income at CIBC Private Wealth.
“We’re talking about yields rising from levels so low that a year ago it would have been inconceivable that U.S. Treasury yields can actually go so low, but alas, equity markets don’t like yields rising very quickly and hence we’ve seen these jitters across the board,” he said further.
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