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Opportunity in Bonds

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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

· Peak in rates an excellent opportunity to buy long-duration bonds

  • Markets sniff out the end of the hiking cycle

Peak rates are bullish for bonds.

It’s a well-established fact that bonds with longer maturities are more affected by changes in interest rates compared to those with shorter maturities. This is because there is a negative relationship between interest rates and bond prices. When interest rates fall, the prices of longer-dated bonds tend to rise more significantly than those of short-dated bonds. This is due to the extended period over which the fixed interest payments are received, making them more valuable when rates are lower.

Hence, the start of a cutting cycle for rates (red arrows) boosts the performance of the TLT Bond ETF, which focuses on long-term U.S. Treasury bonds (20y +) experience a substantial increase in value, as shown by the green arrows.

A graph on a screen

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Source: TradingView

The market sniffs out the end of the hiking cycle

Factoring in the latest data, the Market expects rates to be lowered no later than the middle of 2024.

CME FedWatch signals the likelihood of changes to US interest rates based on Fed monetary policy.

Currently, traders are pricing in virtually zero chance that the US central bank will raise rates in its next meeting.

The dollar index has also been falling for the fourth straight session to the lowest levels since August, indicating that FX traders view the Fed to be done with hiking rates.

Considering the possible benefits from reductions in interest rates, which have recently increased at the quickest pace in four decades, it’s important to note the significant impact these rate changes have had on the TLT. It experienced a dramatic decrease in value, almost 50%, due to these rapid rate hikes. However, when this trend starts to mean-reverse, and rates begin to fall, investing in the long end of the yield curve becomes an attractive strategy.

History often rhymes

Following the 2021 challenging year for U.S. Treasury bonds, 2022 proved even more difficult as the market experienced its worst performance since the French Revolution.

It’s hard to imagine the bond market recording negative returns for three consecutive years, as this has never occurred in recorded history.

Hence, will 2023 be the exception to the rule, or will it finally break the negative trend and allow bondholders to breathe a sigh of relief?

A graph of a financial report

Description automatically generated with medium confidence

Source: BofA

The bond market is modestly negative year-to-date in 2023. However, renewed optimism for the end of the hiking and beginning of the cutting cycle sooner than expected has lifted it over 3.0% in November.

Latest data mixed

However, the lagged effects of rate hikes will need some time to get filtered in through the economy, driving softer growth, which could lead to triggering periods of volatility.

The market narrative is that inflation is softening as growth is holding up, which looks to be, to some degree, the case as undoubtedly inflation has come crashing from nearly double digits to the latest reading of 3.2% last week. Further, companies mentioning “recession” on earnings calls fell to 11%, far from the peaks of 42%-46% in 2020 and 2022, according to Factset.

However, demand is softening, as retail sales dipped in October for the first time in seven months, although less than expected, showing some signs of resilience.

Conclusion

Historically, bonds exhibit great risk/returns trade-off as the Fed pivots to lower rates in Q1 or Q2 of 2024. If inflation continues to decline in conjunction with softening economic data, we might see those cut even earlier.

Finally, we might expect some market volatility as the delayed effects of the recently elevated interest rates fully manifest in the economy.

Investors can buy long-duration bonds using our 5x 20+ Year Treasury Bond

Alternatively, they can short long-duration bonds using 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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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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