As the U.S. Federal Reserve starts to ease monetary policy, the yield curve is starting to steepen after a couple of years inverted. In turn, this is pushing a pair of leveraged exchange traded funds (ETFs) from Direxion higher.
“After roughly two years of ‘inversion,’ yields are now behaving like they do most of the time, with longer-term bonds yielding more than short-term ones,” Morningstar noted. “This may seem like inside baseball, but it has real implications for bond investors.”
Short-term bond funds have been the default move during the time of inversion, but more fixed income investors are stepping further out on the yield curve. As the path towards rate cuts became more clear, investors were quick to spot bullish opportunities in the bond market on the expectation of higher bond prices.
“As it became clear to investors late this summer that the Fed was poised to cut interest rates, yields on shorter-dated bonds—which closely track the central bank’s target interest rate—began to fall,” Morningstar explained.
Both yields on short-term and long-term bonds fell, but the latter didn’t fall quite as much thereby steepening the curve.
“Yields on longer-dated bonds—which track expectations about the state of the economy and the path of fiscal policy way down the line—ticked lower, too, but not nearly as dramatically,” Morningstar added. “When the two-year bond yield fell below the 10-year in early September, the yield curve officially un-inverted.”
Leveraging Bullish Bond Prices
As the rate-cutting cycle commences, the uptrend in bond prices could be in its early stage. As such, if demand for long bonds or bonds in general continues, traders will want to use leveraged ETFs.
Two funds to consider for short-term price increases are the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF ) and the Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD ). Both funds offer triple leverage. That gives traders the opportunity to maximize their profits. But only seasoned traders should consider these funds.
TMF seeks daily investment results of 300% of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. TYD seeks 300% of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. Both funds are up over 8% in the last six months, allowing investors to maximize gains as opposed to investing in individual bond issues.
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