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Bonds Potential Comeback

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at
  • Inflation proves to be stubborn
  • End of the hiking cycle excellent opportunity to add long-duration bonds

Inflation

The Personal Consumption Expenditures Price Index (PCE), a critical inflation gauge for the Federal Reserve, increased by 2.5%[1] year-over-year in February. The Core PCE inflation rate, which excludes the more fluctuating prices of food and energy, went up by 2.8%, aligning with analysts’ forecasts.

From one month to the next, PCE experienced a 0.3% rise from the preceding month, which was below the anticipated 0.4% growth. This monthly growth rate marks a slight deceleration from January’s 0.4% month-to-month increase. Similarly, Core PCE witnessed a 0.3% monthly increase.

Despite a reduction in inflation rates compared to the previous year, the latest report did not fuel optimism for an interest rate cut by the U.S. central bank in its upcoming May meeting. The market continues to predict a nearly 96%[2] probability that the Fed will likely maintain the current interest rate at the next policy meeting.

In recent months, the annual growth rate of the money supply has turned negative, a phenomenon last observed during the Great Depression.

Additionally, it’s generally understood that changes in the money supply precede shifts in inflation by an average of 16 months.

Therefore, even though inflation has demonstrated a tendency to be somewhat sticky in the near term, it is expected to decline further.

As inflation approaches the target rate of 2%, the Federal Reserve will start to lower interest rates.

Bonds

It is widely recognized that bonds with longer durations respond more to interest rate fluctuations than their short-term counterparts.

This phenomenon occurs due to the inverse relationship between bond prices and interest rates. As interest rates decline, the value of bonds with longer maturities typically increases more than that of bonds with shorter maturities.

This is due to the longer timeframe during which the fixed-rate payments are made, which enhances their value in periods of declining interest rates.

Mean-Reversion

The prevailing market outlook indicates that the cycle of reducing interest rates will likely commence around the middle of the year.

TLT (Long 20y+ Bonds) experienced an unprecedented nearly 50% decline since the early pandemic days.

However, the bond ETF partially recovered from its lowest point of just above $81 in October of 2023, a drop of nearly -2SD (standard deviations) below its mean.

Source: Yahoo Finance

As markets anticipate three to four interest rate reductions this year, this outlook is notably positive for long-term assets, such as the TLT (20+ Year Treasury Bond).

It is projected that the TLT will gradually return to its mean level of around $113.

Also, notice the incredible volume spike lately, which implies that many investors might be piling into the bond ETF due to the imminent rate reductions.

 

Inventors can long the TLT using our 5x 20+ Year Treasury Bond.

Alternatively, traders can short the TLT using our -5x 20+ Year Treasury Bond.

 


Footnotes:
  1. Fred
  2. Cmegroup
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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