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