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It Was A Hot Summer For Leveraged Bond ETFs

With the Federal Reserve lowering interest rates in July and investors flocking to safe-haven assets in August as US/China trade tensions spiked, it was a wild summer for leveraged fixed income exchange-traded funds, both the bullish and bearish varieties.

What Happened

Among the leveraged bond ETFs experiencing elevated activity were the Direxion Daily 7-10 Year Treasury Bull 3X Shares (NYSE: TYD) and its bearish equivalent, the Direxion Daily 7-10 Year Treasury Bear 3X Shares (NYSE: TYO) as well as the Direxion Daily 20+ Year Treasury Bull 3X Shares (NYSE: TMF) and the Direxion Daily 20+ Year Treasury Bear 3X Shares (NYSE: TMV).

Some of that action has matriculated into September. For example, traders allocated nearly $14 million to the bullish TMF on Monday, good for the largest one-day inflows among all Direxion's leveraged ETFs, according to issuer data.

Why It's Important

“As volatility and uncertainty rises, so too does the desire for safety and predictability,” said Direxion in a recent note. “This explains the summer’s stampede-like rush to fixed income investments, particularly treasury notes. The buying spree led to a craterous drop in already low yields in fixed income (since the yield on existing notes moves inverse to the value of new ones), which in turn resulted in several inversions of the 2-year and 10-year yield charts.”

More recent data points augur well for bond bulls, For the 10 days ending Monday, Sept. 9, inflows to the bullish TYD, which attempts to deliver triple the daily returns of the ICE U.S. Treasury 7-10 Year Bond Index (IDCOT7TR), equaled 25% of that ETF's assets under management, good for the third-best percentage among Direxion leveraged funds.

Additionally, volume supports the move into TYD as turnover in that fund for the five days ending Sept. 9 was nearly 55% above the trailing 20-day average.

What's Next

With traders pricing in an all but guaranteed rate cut coming before the end of the year, perhaps even later this month, fall could be busy for the aforementioned Direxion bond ETFs.

“Heading into autumn, traders can likely expect more attention paid to the fixed-income market and other rate-sensitive instruments as all eyes turn to the Federal Reserve for three more planned meetings of the FOMC,” said the issuer. “Because the Fed’s current monetary policy plan seems to be 'there is no plan,' traders will certainly be eager for whatever hints the Fed members might be willing to drop prior to the September, October and December meetings.”

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