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Leveraged Treasury Bull ETFs Benefitting from Shift to Risk-Off

This article was originally published on ETFTrends.com.

The Dow Jones Industrial Average plunged almost 800 points on Thursday followed by another day of sell-offs in U.S. equities with a loss of over 500 points on Friday, confirming that a risk-off sentiment is being highlighted by a flight to government debt--a benefit for leveraged Treasury bull exchange-traded funds (ETFs) like the  Direxion Daily 7-10 Year Treasury Bull 3X ETF (TYD) and  Direxion Daily 20+ Year Treasury Bull 3X ETF (TMF) .

In the past month, TYD has risen past its 200-day moving average, while TMF is close to doing the same as the risk-off sentiment has taken hold of the capital markets with fears of a global economic slowdown permeating investors' psyche.

It's certainly welcome news for the bond markets as inflows of capital flood the fixed-income space, but to equities investors, it could be a sign of more pain to come.

"The tide is turning," said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. "The fact the 10-year yield is falling so sharply after the massive correction on Tuesday—we don't even have a dead cat bounce—says there's a lot more pain ahead for equities."

TYD seeks daily investment results equal to 300% of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. TYD invests in securities of the index and ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The index is 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.

Related: Lessons From How Pros Use Bond ETFs

TMF seeks daily investment results worth 300% of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. The fund invests at least 80% of its net assets in securities of the index and ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The 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.

On Monday, U.S. equities were boosted as U.S. President Donald Trump and Chinese president Xi Jinping agreed to cease fire on their tariff-for-tariff battle, giving the markets hope that a year-end rally could ensue. However, it proved to be an overreaction as volatility returned on Tuesday, racking U.S. equities for the remainder of the week.

Meanwhile, fears of an inverted yield curve also helped to rack U.S. equities as sell-offs in stocks were accompanied by an influx of capital into bonds. As equities investors seek asylum into safer-haven assets like debt, the shift is occurring across the spectrum whether it's short or long-term durations.

“The expectations of further turmoil in equities and widening in credit is serving to support Treasuries,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “The main support for USTs being at the front end highlights that investors are comfortable in positioning contrary to what the Fed has been guiding the market to expect.”

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