The Bonds Bear Market Provide Opportunity

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%.

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.

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.

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

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