Direxion announced the expansion of its fixed income product line on Thursday with the launch of two leveraged ETFs targeting a short-term Treasury index. The Direxion Daily 2-Year Treasury Bull 3x Shares (TWOL) seeks 300% of the daily performance of the NYSE Arca Current 2-Year U.S. Treasury Index, a benchmark that consists of the most recently issued 2-year U.S. Treasury notes. The Daily 2-Year Treasury Bear 3x Shares (TWOZ) seeks 300% of the inverse of the daily performance of the same index.
The addition of TWOL and TWOZ expands Direxion’s leveraged fixed income offerings to six funds, joining 300% and -300% ETFs linked to the the NYSE Arca Current 10-Year U.S. Treasury Index (TYD and TYO) and NYSE Arca Current 30-Year U.S. Treasury Index (TMF and TMV). While most leveraged ETFs are linked to equity benchmarks, leveraged bond funds have seen a surge in popularity over the last year. According to the latest industry figures from the National Stock Exchange, leveraged bond ETF assets exceed $5 billion, with the vast majority of that amount in inverse funds. The ProShares UltraShort 20+ Year Treasury (TBT) took in more than $2 billion alone last year.
While ProShares and Direxion both offer leveraged products focusing on long-term and intermediate-term fixed income benchmarks, TWOL and TWOZ will be the first to cover short-term Treasuries. In the current environment, the new funds should attract significant interest from investors looking to play changing interest rates. “The yield on the 2-Year Treasury is historically highly correlated to the Federal funds rate, which many sophisticated investors are currently anticipating movement in due to changing inflation expectations,” stated Dan O’Neill, Direxion Shares’ President. “As a provider of sophisticated investment solutions designed to help optimize institutional-style portfolio strategies, we think it’s an apt time to introduce the only ETFs that offer leveraged exposure to the 2-Year Treasury on both the long and short side, as investors prepare for the Federal Reserve to act.”
Interest Rates In Focus
The outlook for interest rates has become complicated in recent weeks, following some surprising data releases and comments from the Federal Reserve Chairman to Congress. Last week, the U.S. Labor Deportment reported that core CPI–which excludes volatile food and energy prices–fell last month for the first time in nearly 30 years (see Five ETFs For The Great Deflation). Following the massive stimulus plans implemented to revive the U.S. economy, many investors had been expecting an uptick in inflation to force the Fed’s hand in moving rates higher. So the unexpected decline was perhaps an indication that keeping rates near record lows may be sustainable for longer than had been anticipated.
In testimony before the House Financial Services Committee this week, Fed Chairman Ben Bernanke repeatedly stressed that rates need to remain low to ensure that the recovery will last and unemployment will begin to fall. Not surprisingly, Bernanke’s words sent markets in motion: November fed funds futures contracts now have priced in about a 66% chance of a 50 basis point rate hike after the meeting on November 2nd and 3rd. At the start of the week, the same contracts were reflecting nearly a 95% likelihood.
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