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Forget Fed, Bet on Leveraged U.S. Treasury ETFs

Sanghamitra Saha
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Political tensions in the Eurozone, mainly in Italy and Spain, has given a new lease of life to U.S. Treasury bond ETFs. The U.S. bond market has been a little under the weather this year, thanks to rising rate concerns.

Higher inflationary expectations and upbeat economic growth have driven the benchmark treasury yields over 3% this year. Meanwhile, talks of faster-than-expected Fed rate hikes were rife a few days back (read: ETF Strategies to Play the 7-Year High Benchmark Yield).

However, the latest minutes suggest that Fed members are not being able to unite over whether the pace of rate hikes should accelerate beyond three this year (read: Quality ETFs in Focus on Dovish Fed).

The Fed has already implemented a hike in March and is expected to enact two more in 2018. Out of the two, there is more than 90% chance of one being put into effect in June. Meanwhile, the political gridlock in Italy, which calls for a snap election in late July, triggered a safe haven rally and is acting as a driving factor for the U.S. treasury market.

Inside the Debacle

Italy’s current President Mattarella has now appointed Carlo Cottarelli, a pro-austerity economist, to lead a technocrat government. But the latest appointment may not materialize as the anti-establishment Five Star Movement, the anti-immigrant League and ex-premier Silvio Berlusconi’s Forza Italia party are opposing it. Some parties are mulling an exit from the Eurozone, which is a key concern.

Spain also followed suit. The biggest opposition party in Spain, the Socialists, has called for a vote of confidence against prime minister Mariano Rajoy because of an ongoing corruption case.

Sudden Drop in U.S. Treasury Yields

Fears of a possible exit of Italy from the Eurozone pushed safe-haven assets higher.Yield on 10-year U.S. Treasury yield nosedived to 2.77% on May 29 from the month-high of 3.11%. 10-year U.S. Treasury yield has declined the most since the Brexit vote.

Yield on 20-year treasury dropped to 2.87% from the high of 3.19% hit on May 17. iShares 20+ Year Treasury Bond ETF TLT added about 2.2% on May 29 (read: Political Drama in Europe to Push Safe Haven ETFs Higher).

Even, Italian bond yields traded above U.S. Treasury yields for the first time in about a year, per Reuters. Notably, the 10-year Italian government bond yield spiked to 3.19% as bond prices dropped versus just under 2% about two weeks ago.

Leveraged Treasury ETFs in Focus

Against this backdrop, investors with a high-risk tolerance can bet on the leveraged Treasury ETFs. However, these are normally meant for short-term trading.

Direxion Daily 20-Year Treasury Bull 3X TMF –Up 6.35% on May 29

The fund offers three times exposure to the underlying ICE U.S. Treasury 20+ Year Bond Index. It charges 95 bps in fees.

ProShares Ultra 20+ Year Treasury UBT – Up 4.26%

The fund corresponds to two times the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. The expense ratio of the fund is 0.95%.

ProShares Ultra 7-10 Year Treasury UST – Up 2.16%

The fund offers two times the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. It charges 95 bps in fees.

Direxion Daily 7-10 Year Treasury Bull 3X TYD – Up 0.50%

The fund is linked to the 300% of the performance of the ICE U.S. Treasury 7-10 Year Bond Index. The product charges 95 bps in fees.

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