I bought my first real estate in the early 1980s when mortgage rates were in the double digits. I don’t remember the exact fixed rate for the conventional 30-year mortgage, but it was over 12%. At the time I remember thinking about how lucky my dad was when he bought our family home in Brooklyn, New York and availed himself of his services with a 4.25% VA loan. I thought I would never have an opportunity like my father, but I was wrong.
My current home, purchased in 2017, came with a 4.25% fixed rate mortgage. At the end of 2021, I refinanced the loan at 2.95%. At less than 3%, it looked like the banks were giving away money, and they were. Six months after signing the refinancing documents, the rate doubled to 6%. As of Friday, July 22, it stood at just under 6%, double the rate I had locked in at the end of 2021.
Meanwhile, 30-year US Treasury bond futures have declined steadily over the past few years. While the US central bank determines the short-term federal funds rate via its monetary policy path, market forces are responsible for rates further along the yield curve. Inflation at the highest level in more than four decades has been a bearish factor for US 30-year government bonds.
The ProShares UltraPro Short 20+ Year Treasury ETF (NYSEARCA: TTT) is a leveraged instrument that increases as the lower end of the yield curve rises in the short term.
Long bond futures trended lower
Since rising in March 2020 as the global pandemic gripped markets across all asset classes, US Treasury bond futures have trended lower.
The chart shows the trend of lower highs and lower lows in the US long bond futures market. While the US Federal Reserve controls short-term interest rates through the federal funds rate, rates farther along the yield curve are a function of free market dynamics. Bonds rise when buyers are more aggressive than sellers and fall when selling dominates buying. Since the beginning of 2020, sellers have been the most influential factor in the bond market.
The 10-year chart shows the decline to 132-04 in June, the lowest level since April 2014. Long bond futures were trading at the 140 level on Thursday July 21st.
Bear markets are seeing a strong rally
The charts highlight the downward path of less resistance in the bond market for over two years. Meanwhile, bull and bear markets rarely move in a straight line, and corrections or reversals are the norm.
The short-term chart shows rallies from 134-01 on May 9 to 141-23 on May 25 and from 131-01 on June 16 to 142-06 on July 6 on the 30-year Treasury bond futures contract. september. Meanwhile, every rally since the first half of 2020 has been a selling opportunity in the bond market as market forces continue to push interest rates to higher highs.
The Three Bearish Constraints
Three issues point to a continuation of the downtrend in the US government bond market:
- Next week, the US Federal Reserve will raise the short-term federal funds rate by at least 75 basis points to 2.25% to 2.50%. Some market participants believe the Fed could raise rates by 1% at the FOMC meeting. Rising short-term rates often put upward pressure on interest rates further along the yield curve.
- The latest Consumer and Producer Price Index data for June showed inflation at its highest level since the early 1980s. The US central bank has indicated it will continue to use monetary policy to cope with the four-decade peak of the economic situation, despite the risk of recession. The 9.1% rise in the CPI and 11.3% PPI mean rates remain in negative territory, fueling further inflationary pressures.
- The war in Ukraine is contributing to the highest food and energy prices in decades. While the Fed’s tools can respond to demand from the economy, supply issues created by geopolitical events are beyond the control of the central bank. Even if inflation declines over the next few months, interest rates remain well below the rate of inflation, which means that the bond market will continue to adjust to market conditions.
The compelling evidence points to a continuation of higher rates. Meanwhile, sudden declines in the stock market or unexpected events that cause a flight to quality could lead to periodic purchases and rallies in the bond market. Over the past few years, these rallies have allowed sellers to re-establish short positions as the downtrend has remained intact.
The TTT is a leveraged product
The fund summary for the ProShares UltraPro Short 20+ Year Treasury ETF product states:
TTT is a liquid tool, but its leverage means it is only suitable for short-term trading purposes. At the $54.67 level on July 21, TTT had approximately $395 million in assets under management and traded an average of 136,712 shares each day. The ETF charges a management fee of 0.95%. Leverage is a blessing and a curse because it amplifies short-term price movements but causes rapid decay when the market is not moving in the expected direction.
Buy TTT on dips
The most recent decline in the 30-year U.S. Treasury bond futures market took September futures from 141-23 on May 25 to a low of 131-01 on June 16, down 7 .54%.
During the same period, the TTT ETF proceeds rose from $52.55 to $69.49 per share, or 32.24%. The return of the TTT was more than triple the decline of the long bond futures market during the period.
Meanwhile, the TTT is not a product for long-term investors or traders who are bearish on the outlook for the bond market.
The graph shows the impact of time decay on the TTT product.
As the downtrend continues, buying TTT during rallies in the bond market could be the optimal approach to position yourself for higher interest rates. The bond bear will not move in a straight line, providing opportunities for nimble traders who have their finger on the pulse of the interest rate markets. The TTT is a short-term tool that can improve your trading results and protect you against rising rates. Meanwhile, technical resistance in the bond market is around the 142 level, with bonds at just over 140 on July 21. Next week, the Fed will raise the fed funds rate, and we could see a lot of action in US government bonds. market along the yield curve.