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)…
Read More: Tracking Treasurys: Is the Fed Asleep at the Wheel?