Tracking Treasurys: Is the Fed Asleep at the Wheel?

Editor's note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.

The Federal Reserve raised interest rates by 50-basis points* on December 14, bringing the Fed Funds Rate* to 4.50-4.75%. The previous day, there was a consumer price index (CPI) report that came in at 7.1% year-over-year, which was below the estimated 7.3%. In short, short-term rates remain below the annual inflation rate, but signs are mounting that inflation is slowing. But as the yield curve* continues to venture deeper into inverted territory, there are growing concerns over a potential recession coming in 2023.

Are Bond Markets Signaling Recession?

An inverted yield curve has become a hallmark indicator that a recession is potentially on the horizon. There is, however, a lag time between the inversion and the onset of a recession. In other words, an inverted yield curve doesn’t necessarily mean that a recession is imminent. It does often signal a flight-to-safety* trade, as traders bid up Treasurys* with longer-dated maturities. It also may signal that the market doesn’t have as high of expectations for inflation or economic growth down the road, which is a double-edged sword – inflation might be slowing down, but it looks to be at the cost of economic growth.

For traders looking to position according to a lower-inflation and lower-economic growth outlook, Direxion offers a Daily 20+ Year Treasury Bull 3X Shares (Ticker: TMF), which seeks to provide 300%, before fees and expenses, of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index*.

Below is a daily chart of TMF as of December 15, 2022:

Source: TradingView.com

Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.

What if the Recession Already Happened?

Earlier in 2022, there were two consecutive quarters (Q1 and Q2) of negative gross domestic product (GDP). Traditionally, this is what constitutes a recession. But after Q3’s strong GDP print, it may go down in history as potentially one of the shortest recessions ever. Could this have been the recession associated with the inverted yield curve? Time will ultimately tell, but one sign that may signal an economic rebound is a steepening yield curve, which has yet to unfold. Commodities also tend to rally coming out of an economic low as demand increases, which generally has the effect of pushing long-term rates higher. The final revision for Q3 GDP is set to be released on December 22. Estimates are for 2.9% quarter-over-quarter growth.

For traders that think economic growth will be sustained into the near future, Direxion offers a Daily 20+ Year Treasury Bear 3X Shares (Ticker: TMV), which seeks to track 300% of the inverse (or opposite), before fees and expenses, of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index.*

Below is a daily chart of TMV as of December 15, 2022:

Source: TradingView.com

Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.

Potential Alternative Capital Market Opportunities

Direxion offers additional investment options to speculate in fixed income, aside from long-duration Treasuries. The Direxion Daily 7-10 Year Treasury Bear 3X Shares (Ticker: TYO) and Direxion Daily 7-10 Year Treasury Bull 3X Shares (Ticker: TYD) which seek to provide -300% or 300%, respectively, before fees and expenses, of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index*. Traders looking to position specifically in inflation-related bonds may also consider Direxion’s Daily TIPS Bull 2x Shares (Ticker: TIPL) and Daily TIPS Bear 2x Shares (Ticker: TIPD), which aim to track, before frees and expenses, 200%, or 200% of the inverse (or opposite) of the daily performance of the Solactive TIPS ETF Index.*

*Definitions

- Basis point: one hundredth of 1 percentage point.

- Fed Funds Rate: the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.

- Yield Curve: a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.

- Flight-to-safety: a financial market phenomenon occurring when investors sell what they perceive to be higher-risk investments and purchase safer investments.

- Treasury Securities: government bonds from the United Stat. Investors find them attractive because they make twice yearly interest payments and they have the highest credit rating (AAA) of all debt securities, which means they are low risk.

- ICE U.S. Treasury 20+ Year Bond Index: is a market value weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than 20 years. Eligible securities must be fixed rate, denominated in U.S. dollars, and have $300 million or more of outstanding face value, excluding amounts held by the Federal Reserve.  Securities excluded from the Index are inflation-linked securities, Treasury bills, cash management bills, any government agency debt issued with or without a government guarantee and zero-coupon issues that have been stripped from coupon-paying bonds. One cannot directly invest in an index.

- Solactive TIPS ETF Index: an index that holds the iShares TIPS Bond ETF. The fund offers exposure to investment grade US Treasury inflation-protected securities with at least one year remaining in maturity.

- The ICE U.S. Treasury 7-10 Year Bond Index: a market value weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than seven years and less than or equal to ten years. Eligible securities must be fixed rate, denominated in U.S. dollars, and have $300 million or more of outstanding face value, excluding amounts held by the Federal Reserve. Securities excluded from the Index are zero-coupon STRIPS, inflation linked securities, floating rate notes, cash management and Treasury bills, and any government agency debt issued with or without a government guarantee. One cannot directly invest in an index.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

Direxion Shares ETF Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Aggressive Investment Techniques Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, and risks specific to U.S. Government Securities.

Additional risks include, for the Direxion Daily 20+ Year Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily 20+ Year Treasury Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting and Cash Transactions. A security backed by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Additional risks include, for the Direxion Daily 7-10 Year Treasury Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily 7-10 Year Treasury Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting and Cash Transactions. A security backed by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Additional risks include, for the Direxion Daily TIPS Bull and Bear 2X Shares, Daily Index Correlation Risk, and for the Direxion Daily TIPS Bear 2X Shares, risks related to Shorting and Cash Transactions, and Daily Inverse Index Correlation Risk. The value of inflation protected securities, including TIPS, generally will fluctuate in response to changes in “real” interest rates, generally decreasing when real interest rates rise and increasing when real interest rates fall. Real interest rates represent nominal (or stated) interest rates reduced by the expected impact of inflation. In addition, interest payments on inflation indexed securities will generally vary up or down along with the rate of inflation. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Distributor: Foreside Fund Services, LLC.