Several leveraged long-maturity treasury ETFs have seen price surge, although it's only a "small" rebound compared to nearly 90% decline since 2020. For example, the $Direxion Daily 20+ Year Treasury Bull 3X Shares ETF (TMF.US)$, has doubled in size net inflows of $2.5 billion in six months, and prices have risen 50% from their October lows, and $Proshares Trust Proshares Ultra 20+Yr Treasury (UBT.US)$ has increased by 31% since October. The US treasury market hasn't seen such a favorable month since the Ronald Reagan era.
Recently, a series of economic data were perceived as strong signals that the Federal Reserve is done raising interest rates. This optimism fueled demand for long-dated Treasuries, driving the price of the long-dated bond ETFs higher, including the leveraged ETFs and non-leveraged ETFs.
Why do yield changes cause bigger movements in bond prices?
The bullish appetite makes sense with the help of investing math. If yields on 20-year Treasuries hovering near 5%, a drop of 50 basis points would deliver a total return of more than 11% over the next 12 months, according to data from F/m Investments. On the flip side, a 50 basis point rise would only result in a loss of about 1.1%.
“The risk-reward for duration is extraordinarily favorable right now and it’s just the bond math,” Karissa McDonough, fixed income strategist at Nottingham Trust, said. “If you have just a slight decrease in yields from here for the 10-year, we can talk about a double-digit total return in long bonds and we haven’t seen that in literally years.”
While the entire Treasury curve benefits from a decrease in yields, the long end’s higher duration — a measure of a security’s sensitivity to interest-rate changes — would provide significant gains for investors.
How to look ahead to 2024?
There are only two instances in history, 1955-1956 and 1958-1959, where U.S. Treasury bonds fell in price for two consecutive years. Bond prices have risen 100% of the time in the year following two consecutive years of negative returns since 1928. The question that remains is just how positive the bond market could be next year.
Many factors, particularly inflation and the growth rate of the U.S. economy, will determine the degree of any price appreciation seen for bonds in 2024. With a soft landing, or slower growth but no recession, bond prices may not appreciate much beyond their 2023 year-end range. But a recession could force the Fed’s hand to lower interest rates, swiftly pushing bond prices higher.
Risk Disclosure:
These types of ETFs can be helpful for investors looking for ways to magnify their returns on their bond investments, but they also carry a higher level of risk.
It's important to note that leveraged ETFs are designed to achieve their stated leverage daily and may not be suitable for all investors, as the compounding effect of the daily leverage can cause the ETF to deviate significantly from its stated leverage over time.
Arguably, buyers of bond ETFs today are probably getting a worse deal than those who bought at the end of October.
Besides, as the market has been particularly optimistic about the decline in inflation recently, the Fed may avoid talking too much about cutting interest rates next year in the upcoming FOMC meeting, pouring a bucket of cold water on the market. JP Morgan chief economist Michael Feroli noted, ”We think Powell will try to move the conversation away from the timing of the first ease.” With the press conference skewing hawkish, the Fed may push back against the idea that rate cuts could come anytime soon, making bets on the bond market risky in the short term.
