Bulls Chasing Treasuries: Play With Leveraged ETFs

The rapidly spreading coronavirus has sent the global stock market into a tailspin with the U.S. bourses slipping into bear territory. The risk-off sentiments coupled with stimulus package across the globe in order to protect the economy from the deadly virus have sparked huge rally in Treasuries.

The Federal Reserve surprised Wall Street by slashing interest rate back to its financial-crisis-era policy range of 0-0.25%. This marks the second cut in less than two weeks. The central bank also launched a quantitative easing program of at least $700 billion. The central bank will buy at least $500 billion in Treasury securities and at least $200 billion in mortgage-backed securities in the coming months. The move has pushed yields, which is already struggling and has been on a free fall, down drastically. Notably, 10-year Treasury yields plunged to 0.62%.

The Bank of Japan joined the Fed to address the rapidly mounting economic shock of the coronavirus pandemic. It will expand its purchases of stocks, bonds, and other assets and provide zero interest, one-year loans to companies running short of cash to help the economy weather the impact of the virus outbreak. New Zealand’s central bank slashed its benchmark interest rate by 75 basis points and the Reserve Bank of Australia, which already cut its cash rate earlier this month, said it will boost liquidity in short-term funding markets. The Bank of Korea also cut rates by 50 bps.

The latest developments have led to huge demand for Treasuries. As such, investors could tap the opportune moment by going long on this instrument with the help of ETFs. Leveraged Treasury ETFs provide exposure that is a multiple (2 or 3 times) of the performance of the underlying index using various investment strategies such as swaps, futures contracts, and other derivative instruments.

As most of these funds seek to attain their goal on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark over a longer period when compared to a shorter period (such as weeks, months or a year) due to the compounding effect.

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