fbpx

The Bonds Bear Market Could Turn Into Opportunity

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

During the September meeting, the Federal Reserve held interest rates steady, with Fed members saying the central bank could keep rates elevated for much longer than previously expected. The Fed maintained its forecast for another rate hike by year end and reduced the number of rate cuts expected in 2024 to two from four previously.

The Federal Reserve has raised its key interest rate 11 times since March 2022, taking it to a targeted range of 5.25%-5.5%. Since the September meeting, the 20-Year Treasury yield has risen about 0.25%, in effect pricing in the rate increase policymakers indicated then.

The higher for longer message from the Fed triggered a massive sell off in bond markets, sending the 20-Year Treasury yields higher to a 16-year high of 5.25% last week. Higher yields tighten financial conditions and threaten to curb growth, thus helping the Fed to tame inflation.

The surge in U.S. treasury yields has sparked much anxiety among investors, given expectations that interest rates have finally peaked. Following the sharp rise in yields throughout September, earlier this week several Fed members have adopted more dovish tone on further rate hikes, causing a pull back to 4.87%.

A graph of stock market

Description automatically generated

Source: TradingView, 20 Year Treasury Yields

On Wednesday the Federal Reserve released the minutes of the Federal Open Market Committee (FOMC) meeting that was held on the 20 th of September 2023. The document noted that all members of the rate-setting FOMC agreed they could “proceed carefully” on future decisions, which would be based on incoming data.

A point of complete agreement was the belief “that policy should remain restrictive for some time” until the FOMC is confident that inflation is moving towards its goal. A number of members commented that, with the policy rate likely at or near its peak, the focus of monetary policy decisions should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels.

While the meeting decided against a rate hike, in the dot plot of individual members’ expectations, two-thirds of the committee indicated that one more increase would be needed before the year end.

U.S. Treasury yields rebounded strongly on Thursday after data showed U.S. consumer prices increased more than expected in September, which underpinned the views of some Fed members that U.S. interest rates may need to remain higher for longer.

It appears that most probably there is not enough in the CPI report to suggest that the FOMC may need to tighten policy in November; however, the higher readings justify the message that policy needs to remain tighter for longer, with the prospect of another rate hike still being kept on the table. Following Thursday’s consumer prices report futures markets suggest a 40% probability of a U.S. rate increase in December, compared with a 28% chance seen before the report.

A graph of stock market

Description automatically generated

Source: TradingView, iShares 20+ Year Treasury Bond ETF

The iShares 20+ Year Treasury Bond ETF (TLT), which is a proxy for the long-term Treasury bond market, reached a low of $84.06 on Friday – its lowest price level since 2007. While at this point still there is no clear reversal signal evident on the chart, TLT has attracted a record $17.6 billion so far this year in a high conviction bet that interest rates are near a peak and prices are near a bottom.

As bond yields move in the opposite direction of bond prices, investors can use long-term Treasury bond ETFs like TLT to capture significant price appreciation once interest rates start to decline.

With yields on the 20-year Treasury note around the 5% mark at present, investors’ appeal to high interest distributions amid the prospect for a significant price appreciation once the economy slows down is undeniable.

With the current yield on the 20-year Treasuries of 5%, TLT’s risk/reward ratio has become very attractive. A drop in interest rates of 50-basis points from here would deliver a much greater return over the next 12 months, than the loss an unlikely 50-basis point rate rise would produce.

Investors are also optimistic that the U.S. is likely to enter a recession in 2024, which in turn should exert downward pressure on yields. Lower yields would send long end bond prices higher, as such TLT is seen as a hedge against recession.

Leverage Shares 5x 20+ Year Treasury Bond ETP tracks and provides magnified exposure to the performance of TLT.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Related Posts

Gold is in a healthy correction and higher price levels are likely by year end.
Gold is in a healthy correction and higher price levels are likely by year end.
Violeta-540x540-1.jpg
Violeta Todorova
Gold is in a healthy correction and higher price levels are likely by year end.
Gold is in a healthy correction and higher price levels are likely by year end.
Gold is in a healthy correction and higher price levels are likely by year end.
Supply, demand disequilibrium and lower US rates could squeeze the non-precious metal
Supply, demand disequilibrium and lower US rates could squeeze the non-precious metal
Violeta-540x540-1.jpg
Boyan Girginov
Supply, demand disequilibrium and lower US rates could squeeze the non-precious metal
Supply, demand disequilibrium and lower US rates could squeeze the non-precious metal
Supply, demand disequilibrium and lower US rates could squeeze the non-precious metal
Q2 is poised for European stocks’ turnaround and rising interest in energy stocks
Q2 is poised for European stocks’ turnaround and rising interest in energy stocks
Violeta-540x540-1.jpg
Sandeep Rao
Q2 is poised for European stocks’ turnaround and rising interest in energy stocks
Q2 is poised for European stocks’ turnaround and rising interest in energy stocks
Q2 is poised for European stocks’ turnaround and rising interest in energy stocks
Escalation of the conflict in the Middle East threatens to derail the economic recovery.
Escalation of the conflict in the Middle East threatens to derail the economic recovery.
Violeta-540x540-1.jpg
Violeta Todorova
Escalation of the conflict in the Middle East threatens to derail the economic recovery.
Escalation of the conflict in the Middle East threatens to derail the economic recovery.
Escalation of the conflict in the Middle East threatens to derail the economic recovery.
What is an ETF? How does an ETF work? Key characteristics of ETFs.
What is an ETF? How does an ETF work? Key characteristics of ETFs.
Violeta-540x540-1.jpg
Boyan Girginov
What is an ETF? How does an ETF work? Key characteristics of ETFs.
What is an ETF? How does an ETF work? Key characteristics of ETFs.
What is an ETF? How does an ETF work? Key characteristics of ETFs.
Violeta-540x540-1.jpg
Pawel Uchman
A quick primer on leveraged instruments available in markets today.
A quick primer on leveraged instruments available in markets today.
Violeta-540x540-1.jpg
Sandeep Rao
A quick primer on leveraged instruments available in markets today.
A quick primer on leveraged instruments available in markets today.
A quick primer on leveraged instruments available in markets today.

Violeta Todorova

Senior Research

Violeta è entrata a far parte di Leverage Shares nel settembre 2022. È responsabile dello svolgimento di analisi tecniche e ricerche macroeconomiche ed azionarie, fornendo pregiate informazioni per aiutare a definire le strategie di investimento per i clienti.

Prima di cominciare con LS, Violeta ha lavorato presso diverse società di investimento di alto profilo in Australia, come Tollhurst e Morgans Financial, dove ha trascorso gli ultimi 12 anni della sua carriera.

Violeta è un tecnico di mercato certificato dall’Australian Technical Analysts Association e ha conseguito un diploma post-laurea in finanza applicata e investimenti presso Kaplan Professional (FINSIA), Australia, dove è stata docente per diversi anni.

Julian Manoilov

Marketing Lead

Julian è entrato a far parte di Leverage Shares nel 2018 come parte della prima espansione della società in Europa orientale. È responsabile della progettazione di strategie di marketing e della promozione della notorietà del marchio.

Oktay Kavrak

Head of Communications and Strategy

Oktay è entrato a far parte di Leverage Shares alla fine del 2019. È responsabile della crescita aziendale, mantenendo relazioni chiave e sviluppando attività di vendita nei mercati di lingua inglese.

È entrato in LS da UniCredit, dove è stato responsabile delle relazioni aziendali per le multinazionali. La sua precedente esperienza è in finanza aziendale e amministrazione di fondi in società come IBM Bulgaria e DeGiro / FundShare.

Oktay ha conseguito una laurea in Finanza e contabilità ed un certificato post-laurea in Imprenditoria presso il Babson College. Ha ottenuto anche la certificazione CFA.

Sandeep Rao

Research
Sandeep è entrato a far parte di Leverage Shares nel settembre 2020. È responsabile della ricerca sulle linee di prodotto esistenti e nuove, su asset class e strategie, con particolare riguardo all’analisi degli eventi attuali ed i loro sviluppi. Sandeep ha una lunga esperienza nei mercati finanziari. Iniziata in un hedge fund di Chicago come ingegnere finanziario, la sua carriera è proseguita in numerose società ed organizzazioni, nel corso di 8 anni – da Barclays (Capital’s Prime Services Division) al più recente Index Research Team di Nasdaq. Sandeep detiene un M.S. in Finanza ed un MBA all’Illinois Institute of Technology di Chicago.

Gold Retreats But Rally is Not Over

Copper Ready to Explode

Q2 2024 Market Outlook: Rocky Road Ahead

What is an ETF? (Exchange Traded Fund)

How Do Leverage Shares ETPs Trade in Multiple Currencies