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Will 2019 See a Bull Market for Bond ETFs?

Sanghamitra Saha

The year 2018 may not be great for bonds thanks to rising rate interests, but has held up better than stocks at least. iShares 20+ Year Treasury Bond ETF TLT is down 3.4% this year (as of Dec 19, 2018) versus 7.0% loss witnessed the S&P 500 index (read: Global Markets in Red for 2018: 8 Inverse ETF Winners).

A flattening yield curve thanks to a hawkish Fed has been rampant in the United States in 2018, sparking recessionary fears. Plus, economic slowdown in Euro zone and Japan, political tensions in Euro zone, Brexit and U.S.-Sino trade war also kept troubling global markets in 2018, which in turn dragged down long-term bond yields and provided some support to fixed-income investing in late 2018.

The yield on 10-year U.S. Treasury fell to 2.77% on Dec 19 from 2.98% recorded at the start of the month, the yield on the two-year U.S. Treasury slipped to 2.63% from 2.83%. Only yields on three-month, two-month and one-month U.S. Treasuries saw a nudge-up from the start of the month.

Why 2019 Could Usher in as a Year of Bonds?

As the global markets went into a tailspin in the fourth quarter of 2018 and a host of macroeconomic issues cropped up, the Fed chose to take a dovish stance on 2019. The U.S. central bank cut its view of interest rate hikes next year from three to two.  

It also lowered its forecast for 2018 real GDP growth from 3.1% in September to 3.0% and from 2.5% to 2.3% for 2019 but maintained the 2020 growth forecast at 2.0%. The central bank also maintained projections for 2021, which calls for economic growth of 1.8%.

PCE inflation expectations were lowered to 1.9% for 2018 from 2.1% and were guided lower to 1.9% from 2.0% for 2019. Federal funds rate projections for 2018, 2019 and 2020 were maintained at 2.4%, lowered to 2.9% from 3.1% and to 3.1% from 3.4%, respectively. For the longer term, the rate is projected at 2.8%, down from 3.0% from September projections.

Internationally, the ECB and the Bank of Japan have still been practicing an easy money policy. China – one of the key emerging markets – has been showing signs of slowdown. To add to the woes, the International Monetary Fund (IMF) lowered its global growth forecast in October on issues between the United States and its trading partners and recently said that it may again cut the forecast in January. All these call for a benign rate outlook for the New Year and drive bond investing (read: IMF Cuts Global Growth Forecast: ETFs in Focus).

ETFs in Focus

So, we believe that the recent uptrend in the fixed-income market will last for some time. Below we highlight a few leveraged bond ETFs that could be used for outsize gains in the near term (read: Inside the New Short-Duration Bond ETF With Momentum Strategy).

Direxion Daily 20-Year Treasury Bull 3x TMF – Up 7.4% in the past week (as of Dec 19, 2018).

ProShares Ultra 20+ Year Treasury UBT – Up 5.1%

PIMCO 25+ Year Zero Coupon US Treasury Index Fund FLAT – Up 4.4%

Vanguard Extended Duration Treasury ETF EDV – Up 3.5%

Direxion Daily 7-10 Year Treasury Bull 3x ETF TYD– Up 3.1%

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VANGD-EX DUR TR (EDV): ETF Research Reports
 
ISHARS-20+YTB (TLT): ETF Research Reports
 
IPATH-UST FLATN (FLAT): ETF Research Reports
 
PRO-ULT 20+YT (UBT): ETF Research Reports
 
DIR-D 20Y+T BL3 (TMF): ETF Research Reports
 
DIR-D 7-10T BL3 (TYD): ETF Research Reports
 
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