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Bulls Chasing Treasuries: Play With Leveraged ETFs

Sweta Killa

The rapidly spreading coronavirus has sent the global stock market into a tailspin with the U.S. bourses slipping into bear territory. The risk-off sentiments coupled with stimulus package across the globe in order to protect the economy from the deadly virus have sparked huge rally in Treasuries.

The Federal Reserve surprised the Wall Street by slashing interest rate back to its financial-crisis-era policy range of 0-0.25%. This marks the second cut in less than two weeks. The central bank also launched a quantitative easing program of at least $700 billion. The central bank will buy at least $500 billion in Treasury securities and at least $200 billion in mortgage-backed securities in the coming months. The move has pushed yields, which is already struggling and has been on a free fall, down drastically. Notably, 10-year Treasury yields plunged to 0.62% (read: Must-Watch ETF Areas on 2nd Fed Rate Cut of 2020 & QE Launch).

The Bank of Japan joined the Fed to address the rapidly mounting economic shock of the coronavirus pandemic. It will expand its purchases of stocks, bonds and other assets and provide zero interest, one-year loans to companies running short of cash to help the economy weather the impact of the virus outbreak. New Zealand’s central bank slashed its benchmark interest rate by 75 basis points and the Reserve Bank of Australia, which already cut its cash rate earlier this month, said it will boost liquidity in short-term funding markets. The Bank of Korea also cut rates by 50 bps.

The latest developments have led to huge demand for Treasuries. As such, investors could tap the opportune moment by going long on this instrument with the help of ETFs. Leveraged Treasury ETFs provide exposure that is a multiple (2 or 3 times) of the performance of the underlying index using various investment strategies such as swaps, futures contracts and other derivative instruments (read: Bears Grip Market: 5 Safe ETF Investing Zones).

As most of these funds seek to attain their goal on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark over a longer period when compared to a shorter period (such as, weeks, months or a year) due to the compounding effect.

Below, we have highlighted some ETFs that offer leveraged exposure to the Treasuries market.  These funds will continue to be investors’ darlings, given the bearishness in the stock market.

Direxion Daily 20+ Year Treasury Bull 3X Shares TMF

With AUM of $435.3 million, this ETF offers three times exposure to the ICE U.S. Treasury 20+ Year Bond Index. It charges 92 bps in annual fees and trades in average daily volume of 1.5 million shares. The product has risen 51.9% in a month.

ProShares Ultra 20+ Year Treasury UBT

It seeks daily investment results that correspond to two times the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. It charges 95 bps in annual fees and trades in average daily volume of 29,000 shares. The ETF has AUM of $79.7 million and is up nearly 33% in a month (read: Treasury ETFs Hit New Highs as Coronavirus Fears Spread).

ProShares Ultra 7-10 Year Treasury UST

This fund offers leveraged exposure to the mid-term Treasury market as it seeks to match two times daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. It has amassed $43 million in its asset base and charges 95 bps in fees per year from investors. The ETF trades in lower volume of 22,000 shares a day on average and has gained 12.9% in a month.

Direxion Daily 7-10 Year Treasury Bull 3X Shares TYD

This product offers three times leveraged exposure to the ICE U.S. Treasury 7-10 Year Bond Index, charging investors 95 bps in fees. It has AUM of $19.9 million and average daily volume of 8,000 shares. The ETF has returned 19.6% in a month.

Bottom Line

Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Leveraged Bond ETFs here).

Still, for ETF investors who are bullish on the fixed income sector, especially Treasuries in the near term, any of the above products could make for an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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