With brewing unrest that the coronavirus pandemic could become even more inflamed and additional stimulus remains uncertain, bonds have been a popular safe haven along with precious metals in 2020. But August has seen a drop in bond prices, as yields have risen slightly. According to Morgan Stanley however, this month’s slump in U.S. government bonds could spur a correction in equity markets before a new cycle of stock gains, especially with the S&P 500 making fresh highs Tuesday.
“There is growing evidence that long term nominal yields are making a secular trough with several near term catalysts that may extend last week’s rise,” strategists including Michael Wilson wrote in a note on Monday. “Such a development could prove to be very challenging to many equity portfolios that likely embed higher long-duration risk than may be appreciated.”
The good news for equity bulls however is that a selloff in equities would potentially ignite a new bull market in stocks, the note added, as higher long-term yields are usually associated with enhanced economic growth, which the bank anticipates could occur next year. This means that the SPDR S&P 500 ETF Trust (SPY) could eventually see much higher levels.
While Stock indexes and index ETF are mixed on Tuesday after witnessing the S&P 500 drive through a historic intraday high shortly after the open, passing the old February 19th high of 3393.52, the yield on the benchmark 10-year Treasury note was relatively stable at 0.68%, while the yield on the 30-year Treasury bond held at 1.415%, as bonds prices rallied slightly. Yields move inversely to prices.
“U.S. government debt prices were higher Monday morning as the U.S. coronavirus death toll passed 170,000, while House lawmakers were called back to Washington amid a standoff on Postal Service funding,” a CNBC report noted during Monday’s trading session. “The yield on the benchmark 10-year Treasury note was lower at 0.676% and the yield on the 30-year Treasury bond was down at 1.415%. Yields move inversely to prices.”
For investors looking for ETFs to play Treasurys in either direction, the following are noteworthy:
- Direxion Daily 20+ Year Treasury Bull 3X Shares (NYSEArca: TMF): seeks daily investment results, before fees and expenses, of 300% of the daily performance of the ICE U.S. Treasury 20+ 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 20 years.
- Direxion Daily 20+ Year Treasury Bear 3X ETF (NYSEArca: TMV): 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 20+ 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 20 years.
- Direxion Daily 7-10 Year Treasury Bull 3X Shares (NYSEArca: TYD): seeks daily investment results, before fees and expenses, of 300% 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 ten years.
- Direxion Daily 7-10 Year Treasury Bear 3X Shares (NYSEArca: 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 ten years.
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