For fixed income investors looking to extract yield from the bond market, now is an opportune time. One of the reasons keeping yields elevated at their current levels is central bank action overseas.
Domestically, the U.S. Federal Reserve has been trying to juggle a tight monetary policy while at the same time, keeping the threat of a recession at bay or, as often mentioned in the capital markets, allowing for a soft landing. While this is happening, countries like Japan are already loosening their grip on monetary policy, which isn’t doing favors for bullish investors hoping for Treasury notes to rise.
If economic growth keeps running hotter than expected, the aforementioned threat of a recession will continue to dissipate. As such, a flight to safe haven assets like bonds won’t happen, and yields will stay elevated for some time.
“Actions taken by foreign central banks can also weigh on bond prices and push yields higher,” a Markets Insider report noted. “The Bank of Japan’s surprise move to loosen control of its government bonds sent those yields higher, making them more attractive to domestic investors at the expense of U.S. Treasurys.”
In the meantime, the equities rally has lost some of its mojo thus far in the month of August. The pullback isn’t atypical given historical data of market performance in August months, but the threat of rising rates and higher yields continue to drive investor behavior.
“Experts predict yields will continue to trend a bit higher for the year, and some say the 10-year Treasury yield at 4.5% next quarter is not out of the question,” the report added.
Get Bearish on Treasury Prices
Since yields move conversely with bond prices, bearish plays on Treasury notes could continue if yields remain relatively high. As such, traders can consider using the Direxion Daily 20+ Yr Trsy Bear 3X ETF (TMV ) and the Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO ).
“Our base case remains that the U.S. economy will slow down/contract due to the elevated interest rates caused by the Fed rate hiking campaign,” said Lawrence Gillum, chief fixed income strategist at LPL Financial. “So, while we still think the 10-year yield ends the year lower, as long as economic data continues to surprise to the upside, Treasury yields may remain above our 3.25%–3.75% target range in the interim.”
If that’s the case and investors return to the safety of bonds, traders can use the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF ) and the Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD ). Taking both sides of the trade provides dynamic profitability opportunities with leverage, allowing for the potential for further gains.
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