The bond market rally is fizzling out, as inflation fears and rising interest rates continue to stifle the rally that started late last year. Corporate bonds, in particular, have been susceptible, but an outflux of investor money could spell opportunities in the Direxion Daily 20+ Yr Trsy Bear 3X ETF (TMV) and the Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO).
Both funds have been seeing strength the past month with TMV rising close to 6% and TYO up 7%. With the central bank acknowledging that more rate hikes are ahead, this is injecting a bearish sentiment back into bonds again, especially corporate bonds.
“Investment-grade and high-yield corporate bond ETFs suffered a combined net outflow of $8.3bn in February, according to data from BlackRock, the second-largest exodus on record, exceeded only by an isolated spike in June last year, when $9.7bn was pulled from the sector,” a Financial Times article said, noting that the past month’s sell-off was not too far from the $10.2 billion figure that exited corporate bond ETFs during the pandemic sell-off in.
“We came into February with risk on and with credit and high yield in particular in high demand,” said Todd Rosenbluth, head of research at VettaFi, after corporate bond ETFs took in $15 billion in January.
“In the US, investors came in with optimism that the Federal Reserve would stop raising interest rates,” Rosenbluth said. But he added that the strength of US economic data means “there is an expectation that rate rises are going to continue in the coming months, and therefore there has been a flight to quality, in particular short-duration Treasury products”.
Thrice the Leverage in Bond Bearishness
As investors fret over interest rates, rising yields are putting downward pressure on bonds. These yields fit right into the hands of bearish bond traders with leveraged ETFs like TMV and TYO.
TMV seeks daily investment results before fees and expenses of 300% of the inverse of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. TMV invests in swap agreements, futures contracts, short positions, or other financial instruments that provide inverse or short leveraged exposure to the index, which is a market value weighted index that includes publicly issued U.S. Treasury debt securities that have a remaining maturity of greater than 20 years.
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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