Stubborn Inflation and Higher Yields Could Keep Bond Bulls At Bay

The capital markets have been hanging on the U.S. Federal Reserve’s every word, looking for any indication of rate cuts. But as the higher-for-longer narrative continues to go on, stubborn inflation and elevated yields could keep bond bulls at bay.

Right now, patience is key as the Fed mulls over economic data and determines whether to institute rate cuts. In the meantime, Treasury notes could be volatile as their guidance has been moving markets, but traders who are willing to play both bullishness and bearishness could stand to benefit. It may be a more optimal strategy than simply waiting for rate cuts.

“Bond investors hoping to make money from eventual (although probably delayed) interest-rate cuts by the Federal Reserve might need to start looking beyond long-term Treasuries,” a Barron’s article said, noting that Treasury yields are still close to their highs. “Inflation is turning out to be like the annoying, unwanted house guest that doesn’t realize that they’ve long overstayed their welcome.”

If inflation continues to run hot, that higher-for-longer narrative could persist. In the worst case scenario, especially for bullish bond investors, the Fed could pivot and continue raising rates.

“Looking at the 10-year yield now and based on the inflation data that we continue to see, we could see even higher levels than today,” said Ed Egilinsky, managing director with Direxion.

As the Barron’s article pointed out, the other or more hopeful scenario is that the Fed will eventually loosen monetary policy and yields in turn will fall. But as mentioned, if the Fed takes an unexpected path, traders should be ready with tactical tools to adapt to the market.

“But investors making that bet might be disappointed, as some market watchers see inflation staying put and Treasury yields heading even higher,” the Barron’s report added.

4 Ways to Trade Fluctuating Treasury Notes

To be better prepared for rate decisions in the bond market, inverse ETFs can be of benefit by allowing traders to play both sides. If yields rise, 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).

When bond prices rise, bullish options include the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF) and the Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD). All funds use 300% leverage, allowing traders to maximize their profits whether they have bullish or bearish inclinations.

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