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In the past 50 years, negative bond returns have been infrequent and relatively small. Out of the previous 47 calendar years, negative returns only occurred in 5 instances, and the maximum decline was around -5%. However, this trend was shattered last year when the bond market experienced its worst performance since the French Revolution, with a jaw-dropping decline of 13%. Following this challenging period for bond traders, it is likely that the market will rebound in 2023. Fixed-income investments are expected to generate returns closer to their historical average of approximately 6.6%. This outlook is auspicious if the highly probable scenario of rate cuts materializes this year.
The Federal Reserve implemented an aggressive interest rate policy, leading to a cumulative increase of 5.00% in the Fed funds rate from March 2022 to May 2023, aimed at controlling inflation. As we approach the end of the hiking cycle, the most recent data on inflation indicates a consistent slowdown for the past ten months. This can be attributed to the delayed impact of reducing the money supply and raising interest rates, which has started to affect various inflation indicators. In June 2022, the year-over-year inflation reached its peak at 9.1%. However, it has since declined to 4.9%, which is still significantly higher than the Federal Reserve’s target inflation rate of 2% annually. Despite this, following its latest meeting, the central bank hinted at a possible pause in rate hikes, stating that it will closely monitor incoming information and assess its implications for monetary policy.
What happens to bonds if interest rates drop?
When interest rates fall, bond prices typically rise, and there may be an
opportunity to profit if an investor sells the bond before maturity. For
instance, if rates drop 1%, previously issued bonds are more attractive
than current ones, as debt issuers will take full advantage of the now
lower rates, so investors would be willing to pay a premium — above the par
value — for those bonds. If an investor sells when the bond is trading at a
premium, they can profit from the capital appreciation and the income
earned up to that point on the bond.
Bond’s comeback
Let’s look at the long end of the yield curve or the “TLT” (20+ Year Treasury Bond ETF); given the incredible drop over the last two years, bottoming at the -2 standard deviations line, it still looks undervalued, trading over one standard deviation, below its mean value of 126.
The bond market expects rate cuts based on the 2-year treasury securities, which have been reliable predictors of Fed rate movements since the mid-90s. This anticipation is driven by the possibility of a recession or a hard landing triggered by a credit event indicated by the inverted yield curve. As the hiking cycle nears its end, a pause will likely be followed by rate cuts. The banking system faces high contagion risks, and the economy cannot sustain the current rate trajectory. Therefore, rate cuts are seen as necessary to address these concerns and support stability.
Bonds and rate cuts
Market participants’ highly anticipated rate cuts will be positive for
fixed income once they materialize. The long end of the yield curve is
where investors want to be. In the past, 30-year treasuries outperformed
90% of the time, averaging over 7% returns in the 3 and 6 months post-last
rate hikes.
Active traders might consider leveraging their long bond bets using our „ 5x 20+ Year Treasury Bond“
Alternatively, contrarian investors might bet inflation will not decrease by buying our „-5x 20+ Year Treasury Bond“
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
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Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
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Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
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Terms and Conditions
Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
