How Are Short-Term Traders Looking To Play The Volatile and Bearish US Treasury Market In 2022?

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The U.S. Treasury market is arguably in a rout, having suffered its worst drawdown in 40 years, with long-term Treasurys losing over 15% year-to-date.1 The yield on the benchmark 10-year Treasury 2 recently hit a 52-week high of 3.06%, a sharp increase from its 52-week low of 1.32%. 

With the bond market in bearish territory, some investors have reportedly begun bottom fishing, anticipating a sharp rebound in Treasury prices if a substantial correction occurs and interest rates drop amid a flight to quality. Others remain cautious, expecting further downside potential if inflation remains unchecked and pending rate hikes fail to quell it. 

The question is: What can investors expect from the Treasury market? And how can they trade based on where they think the market is moving?

Bonds Markets At Historical Lows

When the annual inflation rate hit a staggeringly high 8.5%3 in March, many investors adopted a risk-off attitude when it comes to the bond market, especially amid high uncertainty resulting from the Federal Reserve's anticipated stance and actions.

Speculation remains rampant amid the impact of the Fed's aggressive monetary tightening plan to combat surging inflation, and unwinding of assets on its $9 trillion balance sheet, with many traders pricing in multiple 50 to 75 basis-point hikes by year-end. 

Although the Fed recently hiked rates by 25 basis points* to 0.50%, hawkish comments from Chairman Jerome Powell on the possibility of a 50 basis-point hike4 in May sparked further sell-offs in Treasurys throughout April, with yields spiking even higher. Shortly after on May 4th, the Fed raised interest rates by a historical 50 basis points,5 with Jerome Powell stating that the Fed would not be considering future hikes greater than that. 

Amid this, correlations between Treasurys and equities have steadily crept upward into positive territory. This has many traders fearing that the diversification benefit Treasurys provided in the falling-rate environment of the last decade during market sell-offs might be nullified now. 

Key Market Drivers And Catalysts To Watch For?

Key market drivers and catalysts investors may want to watch when trading Treasurys are interest rate changes, inflation, equity market/geopolitical risk and bond yields. 

Interest rate changes are generally anticipated ahead of time and priced in based on the consensus market estimate of the Fed's stance before each meeting — whether dovish or hawkish. An unexpected Fed decision to raise rates above or keep them below what is expected can spark sharp movements in the prices of Treasury bonds. 

Inflation is more of a leading indicator. As measured on a year-over-year percentage increase basis by the consumer price index (CPI), inflation can give traders a sense of how the Fed's monetary policy is likely to respond. In general, higher-than-anticipated numbers will likely spark more aggressive rate hikes, which may drop bond prices further.

Traders should also keep an eye on the domestic and global equity markets. Even amid a high inflation rising interest rate environment, there is still good evidence that U.S. Treasurys remain a safe haven asset to flock to when substantial corrections or uncertainty occur. Treasury prices have risen sharply multiple times recently despite the prospect of rising rates in response to renewed COVID lockdowns in Shanghai and the Russian invasion of Ukraine.

Finally, a good barometer of market performance to monitor is the yields for 2-, 10- and 30-year Treasurys. Assessing their relative increases/decreases relative to 52-week highs/lows and historical figures could help traders get a sense of the current market trends and where prices might be headed in the short term. 

Short-Term Trading The US Treasury Market With Direxion's ETFs?

The Treasury bear market of 2022 could give savvy short-term traders any number of opportunities, whether by going long or short. Exchange-traded funds (ETFs) like Direxion's Daily 20+ Year Treasury Bull (TMF) & Bear (TMV) 3X Shares and Daily 7-10 Year Treasury Bull (TYD) & Bear (TYO) 3X Shares can be highly useful here. 

TMF and TMV track the performance of the ICE U.S. Treasury 20+ Year Bond Index, whereas TYD and TYO track the performance of the ICE U.S. Treasury 7-10 Year Bond Index. 

Both ETFs use swaps to add 200% daily leverage. That means each trade you make yields doubles the returns — or doubles the losses, which is why it’s important to do your research and have a clear strategy in place to take profits or cut losses. 

TMF and TYD are the bullish ETF you would trade when you think Treasury prices are likely to go up. TMV and TYO, on the other hand, are your inverse or bearish ETF, meant to be traded when you think Treasury prices are headed for a dip. 

All four ETFs are highly liquid, making it hopefully easier for traders to size their positions and make easy entry and exit based on their predictions for the Treasury market's movements. A strategy that switches nimbly between both based on the market drivers and catalysts enumerated above might theoretically help investors in either direction Treasury yields go. 

As with all leveraged ETFs, instruments like TMF, TMV, TYD and TYO can be a powerful way to magnify short-term exposure but only if you do your due diligence on their underlying holdings, have a strong investment thesis and outlook for the Treasury market and a high risk tolerance. 

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

*A basis point is 1/100 of 1%.



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