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After months of declines, the world's largest bond market is amid a sharp rally fueled by bets that Fed rate hikes might be nearing an end. Notably, Treasuries wrapped up the best month in nearly four decades and have been continuing their trend with the start of December (read: Treasury ETFs on Track for Best Month Since March).
This has led to huge demand for Treasuries. As such, investors could tap the opportune moment by going long on this instrument with the help of ETFs to make quick profits, as these could see huge gains in a very short time frame than simple products. These are Direxion Daily 20+ Year Treasury Bull & Bear 3X Shares (TMF - Free Report) , ProShares Ultra 20+ Year Treasury (UBT - Free Report) , Direxion Daily 7-10 Year Treasury Bull Shares (TYD - Free Report) and ProShares Ultra 7-10 Year Treasury (UST - Free Report) .
Leveraged Treasury ETFs provide multiple exposures (2X or 3X) to the daily performance of the underlying index. These funds employ various investment strategies, such as the use of swaps, futures contracts and other derivative instruments to accomplish their objectives.
As most of these funds seek to attain their goals on a daily basis, their performances could vary significantly from the inverse performance of the underlying index or benchmark over a longer period than a shorter period (such as weeks, months or a year) due to the compounding effect (read: Time to Buy Leveraged Treasury Bond ETFs?).
Rate Cut Bets Rise
The latest round of data points, including easing inflation and steady job growth, has strengthened the idea that the Fed is done with rate hikes and could potentially start cutting them next year.
Per the latest CME FedWatch tool data, markets are pricing in a roughly 98% chance of interest rates being left unchanged in December. The tool predicts a 53.4% chance of the Fed implementing a 25-bps rate cut and a 6.8% likelihood of a 50-bps reduction during the March meeting. Looking to May, the probability of rate cuts increases significantly. There is only a 13% chance that rates will be between 5.25-5.50%, with a 38.6% probability of a 50-bps cut in Fed funds rates and a 43.5% chance of a 25-bps cut.
The speculation has brought down yields from their highest levels in more than a decade. The yield on 10-year Treasuries slipped below 4.2% for the first time since early September. As Treasury bonds and yields are inversely correlated, the drop in yields has led to a rally in Treasuries.
With an AUM of $3.5 billion, Direxion Daily 20+ Year Treasury Bull 3X Shares offers three times exposure to the ICE U.S. Treasury 20+ Year Bond Index. It charges 90 bps in annual fees and trades in an average daily volume of 42 million shares. The product has risen 29% in a month.
ProShares Ultra 20+ Year Treasury seeks daily investment results that correspond to two times the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. It charges 95 bps in annual fees and trades in an average daily volume of 116,000 shares. ProShares Ultra 20+ Year Treasury has an AUM of $78 million and has moved up nearly 19% in a month.
ProShares Ultra 7-10 Year Treasury offers leveraged exposure to the mid-term Treasury market as it seeks to match two times the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. ProShares Ultra 7-10 Year Treasury has amassed $15.8 million in its asset base and charges 95 bps in fees per year from investors. The ETF trades in a lower volume of 10,000 shares a day on average and has gained 5.7% in a month.
Direxion Daily 7-10 Year Treasury Bull Shares offers three times leveraged exposure to the ICE U.S. Treasury 7-10 Year Bond Index, charging investors 95 bps in fees. It has an AUM of $52 million and an average daily volume of 46,000 shares. Direxion Daily 7-10 Year Treasury Bull Shares has returned about 10% in a month.
Bottom Line
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Leveraged Bond ETFs here).
For ETF investors who are bullish on the fixed-income sector, especially Treasuries in the near term, any of the above products could make for an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance and a belief that the “trend is the friend” in this corner of the investing world.
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Leveraged Treasury ETFs in Vogue on Rate Cut Bets
After months of declines, the world's largest bond market is amid a sharp rally fueled by bets that Fed rate hikes might be nearing an end. Notably, Treasuries wrapped up the best month in nearly four decades and have been continuing their trend with the start of December (read: Treasury ETFs on Track for Best Month Since March).
This has led to huge demand for Treasuries. As such, investors could tap the opportune moment by going long on this instrument with the help of ETFs to make quick profits, as these could see huge gains in a very short time frame than simple products. These are Direxion Daily 20+ Year Treasury Bull & Bear 3X Shares (TMF - Free Report) , ProShares Ultra 20+ Year Treasury (UBT - Free Report) , Direxion Daily 7-10 Year Treasury Bull Shares (TYD - Free Report) and ProShares Ultra 7-10 Year Treasury (UST - Free Report) .
Leveraged Treasury ETFs provide multiple exposures (2X or 3X) to the daily performance of the underlying index. These funds employ various investment strategies, such as the use of swaps, futures contracts and other derivative instruments to accomplish their objectives.
As most of these funds seek to attain their goals on a daily basis, their performances could vary significantly from the inverse performance of the underlying index or benchmark over a longer period than a shorter period (such as weeks, months or a year) due to the compounding effect (read: Time to Buy Leveraged Treasury Bond ETFs?).
Rate Cut Bets Rise
The latest round of data points, including easing inflation and steady job growth, has strengthened the idea that the Fed is done with rate hikes and could potentially start cutting them next year.
Per the latest CME FedWatch tool data, markets are pricing in a roughly 98% chance of interest rates being left unchanged in December. The tool predicts a 53.4% chance of the Fed implementing a 25-bps rate cut and a 6.8% likelihood of a 50-bps reduction during the March meeting. Looking to May, the probability of rate cuts increases significantly. There is only a 13% chance that rates will be between 5.25-5.50%, with a 38.6% probability of a 50-bps cut in Fed funds rates and a 43.5% chance of a 25-bps cut.
The speculation has brought down yields from their highest levels in more than a decade. The yield on 10-year Treasuries slipped below 4.2% for the first time since early September. As Treasury bonds and yields are inversely correlated, the drop in yields has led to a rally in Treasuries.
Let’s delve deeper into the above-mentioned ETFs:
Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF - Free Report)
With an AUM of $3.5 billion, Direxion Daily 20+ Year Treasury Bull 3X Shares offers three times exposure to the ICE U.S. Treasury 20+ Year Bond Index. It charges 90 bps in annual fees and trades in an average daily volume of 42 million shares. The product has risen 29% in a month.
ProShares Ultra 20+ Year Treasury (UBT - Free Report)
ProShares Ultra 20+ Year Treasury seeks daily investment results that correspond to two times the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. It charges 95 bps in annual fees and trades in an average daily volume of 116,000 shares. ProShares Ultra 20+ Year Treasury has an AUM of $78 million and has moved up nearly 19% in a month.
ProShares Ultra 7-10 Year Treasury (UST - Free Report)
ProShares Ultra 7-10 Year Treasury offers leveraged exposure to the mid-term Treasury market as it seeks to match two times the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. ProShares Ultra 7-10 Year Treasury has amassed $15.8 million in its asset base and charges 95 bps in fees per year from investors. The ETF trades in a lower volume of 10,000 shares a day on average and has gained 5.7% in a month.
Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD - Free Report)
Direxion Daily 7-10 Year Treasury Bull Shares offers three times leveraged exposure to the ICE U.S. Treasury 7-10 Year Bond Index, charging investors 95 bps in fees. It has an AUM of $52 million and an average daily volume of 46,000 shares. Direxion Daily 7-10 Year Treasury Bull Shares has returned about 10% in a month.
Bottom Line
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Leveraged Bond ETFs here).
For ETF investors who are bullish on the fixed-income sector, especially Treasuries in the near term, any of the above products could make for an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance and a belief that the “trend is the friend” in this corner of the investing world.