Editing Direxion daily 20 year treasury bull 3x
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{{Infobox company | {{Infobox company | ||
| name = Direxion 20 | | name = Direxion 20+ Treasury Bull 3x ETF | ||
| logo = Direxion.svg | |||
| trade_name = TMF | | trade_name = TMF | ||
| type = 3x Leveraged ETF | | type = 3x Leveraged ETF | ||
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(as of 22/07/2022)}} | (as of 22/07/2022)}} | ||
[[File:2023-07-20 152553.png|thumb|Direxion ETF<ref>https://www.direxion.com/product/daily-20-year-treasury-bull-bear-3x-etfs</ref>]] | [[File:2023-07-20 152553.png|thumb|Direxion ETF<ref>https://www.direxion.com/product/daily-20-year-treasury-bull-bear-3x-etfs</ref>]] | ||
The Direxion Daily 20+ Year Treasury Bull & Bear 3X Shares seek daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the ICE U.S. Treasury 20+ Year Bond Index.<ref>https://www.direxion.com/product/daily-20-year-treasury-bull-bear-3x-etfs</ref> This special type of derivative can hedge against recession by taking advantage of deteriorating economy. | |||
The Direxion Daily 20+ Year Treasury Bull & Bear 3X Shares seek daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the ICE U.S. Treasury 20+ Year Bond Index.<ref>https://www.direxion.com/product/daily-20-year-treasury-bull-bear-3x-etfs</ref> | |||
== The idea == | == The idea == | ||
TMF offers a powerful instrument for investors with a bullish outlook on US 20+ years Treasury bonds. In a form of leveraged ETF, TMF allow investors to take advantage of the deterioriatng economy by betting on long term Treasury yields to fall, mainly caused by the US interest rate cuts | TMF offers a powerful instrument for investors with a bullish outlook on US 20+ years Treasury bonds. In a form of leveraged ETF, TMF allow investors to take advantage of the deterioriatng economy by betting on long term Treasury yields to fall, mainly caused by the US interest rate cuts.<ref>https://etfdb.com/etf/TMF/#etf-ticker-profile</ref> | ||
{| class="wikitable" | {| class="wikitable" | ||
|+ | |+ | ||
!Data | !Data | ||
!Value (as of 22/07/2023) | !Value (as of 22/07/2023) | ||
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|Credit Rating | |Credit Rating | ||
|AAA | |AAA | ||
|} | |} | ||
== Current Holdings == | == Current Holdings == | ||
{| class="wikitable" | {| class="wikitable" | ||
|+TMF - Portfolio (as of 20/07/2023) | |+TMF - Portfolio (as of 20/07/2023) | ||
!Security Description | !Security Description | ||
!Ticker | !Ticker | ||
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| | | | ||
|Short Swap | |Short Swap | ||
| | | -3.83 (short) | ||
|} | |} | ||
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Due to the high risk, TMF is typically used by traders to profit from the index's short term trends or through technical analysis. Therefore leveraged ETFs have the potential to provide significant gains as well as losses, and provide both long and short exposure to a certain index. | Due to the high risk, TMF is typically used by traders to profit from the index's short term trends or through technical analysis. Therefore leveraged ETFs have the potential to provide significant gains as well as losses, and provide both long and short exposure to a certain index. | ||
Typical holdings | Typical holdings include a signficant proportion invested in short term securities and a smaller position on volatile derivatives. Cash is generally used to meet financial obligations caused by the losses on the derivatives. This is held by maintaing a constant leverage ratio. | ||
== US Treasury Bonds == | == US Treasury Bonds == | ||
US Treasury Bonds are debt securities issued by the US government in exchange of a fixed annual interest. This type of sovereign debt is insured by the US government thus commonly referred as the risk free investment. Buying a Treasury bond is effectively lending money to the US government in exchange of a stated annual interest. | US Treasury Bonds are debt securities issued by the US government in exchange of a fixed annual interest. This type of sovereign debt is insured by the US government thus commonly referred as the risk free investment. Buying a Treasury bond is effectively lending money to the US government in exchange of a stated annual interest. | ||
Bond prices of the US Treasury Bonds are influenced by many factors, including monetary policies, interest rates, economic growth and many more which are explained in Macroeconomics section.<ref>[https://www.investopedia.com/ask/answers/062315/which-economic-factors-impact-treasury-yields.asp#:~:text=Interest%20rates%2C%20inflation%2C%20and%20economic%20growth%20are%20among%20the%20biggest,the%20direction%20of%20Treasury%20yields. https://www.investopedia.com/ask/answers/062315/which-economic-factors-impact-treasury-yields.asp#:~:text=Interest%20rates%2C%20inflation%2C%20and%20economic%20growth%20are%20among%20the%20biggest,the%20direction%20of%20Treasury%20yields.]</ref> | Bond prices of the US Treasury Bonds are influenced by many factors, including monetary policies, interest rates, economic growth and many more which are explained in Macroeconomics section.<ref>[https://www.investopedia.com/ask/answers/062315/which-economic-factors-impact-treasury-yields.asp#:~:text=Interest%20rates%2C%20inflation%2C%20and%20economic%20growth%20are%20among%20the%20biggest,the%20direction%20of%20Treasury%20yields. https://www.investopedia.com/ask/answers/062315/which-economic-factors-impact-treasury-yields.asp#:~:text=Interest%20rates%2C%20inflation%2C%20and%20economic%20growth%20are%20among%20the%20biggest,the%20direction%20of%20Treasury%20yields.]</ref> | ||
=== ICE U.S. Treasury 20+ Year Bond Index (IDCOT20) === | === ICE U.S. Treasury 20+ Year Bond Index (IDCOT20) === | ||
This index illustrates the performance of US dollar fixed rate securities with maturity date longer than twenty | This index illustrates the performance of US dollar fixed rate securities with maturity date longer than twenty years.<ref>https://www.theice.com/publicdocs/data/ICE-Indices_20+yrs.pdf</ref> TMF provides 300% daily returns of IDCOT20. | ||
{| class="wikitable" | {| class="wikitable" | ||
|+Bonds Key terms | |+Bonds Key terms | ||
!Terms | !Terms | ||
!Definition | !Definition | ||
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|- | |- | ||
|Yield to maturity | |Yield to maturity | ||
|Percentage rate of return assuming the investors holds the bond to maturity<ref | |Percentage rate of return assuming the investors holds the bond to maturity<ref>[https://www.investopedia.com/ask/answers/020215/what-difference-between-yield-maturity-and-coupon-rate.asp#:~:text=The%20yield%20to%20maturity%20(YTM)%20is%20the%20percentage%20rate%20of,(par%20value)%20at%20maturity. https://www.investopedia.com/ask/answers/020215/what-difference-between-yield-maturity-and-coupon-rate.asp#:~:text=The%20yield%20to%20maturity%20(YTM)%20is%20the%20percentage%20rate%20of,(par%20value)%20at%20maturity.]</ref> | ||
|} | |} | ||
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=== Monetary Policy === | === Monetary Policy === | ||
Quantitative Tightening (QT) refers to reducing the liquidity out of the financial market. This is implemented by the US Federal Reserve shrinking its balance sheet by either selling the US Treasury bonds or letting the bonds on their balance sheet mature without reissuance. Quantitative tightening increases the amount of bonds available for investors which forces the bond yields higher in order to attract investors. This results in lower bond prices, and has a negative impact on the performance of TMF.<ref name=":0" | Quantitative Tightening (QT) refers to reducing the liquidity out of the financial market. This is implemented by the US Federal Reserve shrinking its balance sheet by either selling the US Treasury bonds or letting the bonds on their balance sheet mature without reissuance. Quantitative tightening increases the amount of bonds available for investors which forces the bond yields higher in order to attract investors. This results in lower bond prices, and has a negative impact on the performance of TMF.<ref name=":0" /> | ||
Quantitative Easing (QE) is the reverse of quantitative tightening. This is commonly referred as "money printing", where the government | Quantitative Easing (QE) is the reverse of quantitative tightening. This is commonly referred as "money printing", where the government issue bonds and the Federal Reserve buys those issued bonds. This increases the liquidity in the financial market and naturally leads to currency devaluation. Implementing QE is effectively issuing more debt, thus the Federal Reserve lowers the interest rate to minimise the cost of debt as much as possible. Lowering interest rates lead to higher bond prices, therefore QE has a positive impact on TMF performance.<ref>https://www.investopedia.com/ask/answers/012815/how-does-quantitative-easing-us-affect-bond-market.asp</ref> | ||
=== Recession === | === Recession === | ||
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==== Inverted Yield Curve ==== | ==== Inverted Yield Curve ==== | ||
Treasury bonds with longer maturity date typically has a higher yield, as it has increased economic uncertainty and devaluation with rising annual inflation. However when shorter bonds have a higher yield than long term bonds, it is described as a yield curve inversion. This inversion is most commonly measured by 2 year yield minus 10 year yield. When this metric dips below 0 basis point, it accurately predicted every recession in the last half century thus regarded as an accurate indicator of a recession. Historically it required 6 to 18 months since the inversion for the recession to occur. It's recognised as a reliable recession indicator as it illustrates the shortage of money supply in the near term, which indicate the economic turmoil. | Treasury bonds with longer maturity date typically has a higher yield, as it has increased economic uncertainty and devaluation with rising annual inflation. However when shorter bonds have a higher yield than long term bonds, it is described as a yield curve inversion. This inversion is most commonly measured by 2 year yield minus 10 year yield. When this metric dips below 0 basis point, it accurately predicted every recession in the last half century thus regarded as an accurate indicator of a recession. Historically it required 6 to 18 months since the inversion for the recession to occur. It's recognised as a reliable recession indicator as it illustrates the shortage of money supply in the near term, which indicate the economic turmoil. | ||
Yield curve inverted on July 2022 and its been deteriorating to negative | Yield curve inverted on July 2022 and its been deteriorating to nearly negative 100 basis points (as of 22/07/2023).<ref>https://fred.stlouisfed.org/series/T10Y2Y</ref> | ||
=== Inflation === | === Inflation === | ||
Increasing inflation diminishes the value of bond's future cash flows. As occurred in 2022, if a bond has a coupon rate of 3% and inflation rate (Consumer Price Index) is at 9%, real yield of that particular bond is -6%. This again is correlated to the Federal Reserve's monetary policy as the interest rates will rise in order to bring down inflation. Therefore higher inflation leads to higher interest rates, higher yields will be demanded by investors which brings to bond prices down. | Increasing inflation diminishes the value of bond's future cash flows. As occurred in 2022, if a bond has a coupon rate of 3% and inflation rate (Consumer Price Index) is at 9%, real yield of that particular bond is -6%. This again is correlated to the Federal Reserve's monetary policy as the interest rates will rise in order to bring down inflation. Therefore higher inflation leads to higher interest rates, higher yields will be demanded by investors which brings to bond prices down. | ||
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June Consumer Price Index was at 3% from the high of 9.1% in June 2022, which decreased the probability of further interest rate hikes. As of 22/07/2023, economic consensus indicate 70% of investors are anticipating a 25 basis point rate hike in July Federal Open Market Committee, and 33% are expecting a further 25 basis point hike in September FOMC. | June Consumer Price Index was at 3% from the high of 9.1% in June 2022, which decreased the probability of further interest rate hikes. As of 22/07/2023, economic consensus indicate 70% of investors are anticipating a 25 basis point rate hike in July Federal Open Market Committee, and 33% are expecting a further 25 basis point hike in September FOMC. | ||
=== Monetary Policy === | |||
Quantitative Tightening (QT) refers to reducing the liquidity out of the financial market. This is implemented by the US Federal Reserve shrinking its balance sheet by either selling the US Treasury bonds or letting the bonds on their balance sheet mature without reissuance. Quantitative tightening increases the amount of bonds available for investors which forces the bond yields higher in order to attract investors. This results in lower bond prices, and has a negative impact on the performance of TMF.<ref name=":0">https://www.investopedia.com/quantitative-tightening-6361478</ref> | |||
Quantitative Easing (QE) is the reverse of quantitative tightening. This is commonly referred as "money printing", where the government issue bonds and the Federal Reserve buys those issued bonds. This increases the liquidity in the financial market and naturally leads to currency devaluation. Implementing QE is effectively issuing more debt, thus the Federal Reserve lowers the interest rate to minimise the cost of debt as much as possible. Lowering interest rates lead to higher bond prices, therefore QE has a positive impact on TMF performance. | |||
== Microeconomics == | == Microeconomics == | ||
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=== Credit Card Debt === | === Credit Card Debt === | ||
US credit card debt is at an all time high at $993B as of 5th July 2023.<ref>https://www.foxbusiness.com/economy/credit-card-debt-rising-double-edged-sword-economy</ref> Delinquency rate on credit card loans have been increasing for the sixth consecutive quarter, nearing the pre-pandemic level at 2.43% at Q1 2023.<ref>https://fred.stlouisfed.org/series/DRCCLACBS</ref> Rising debt and its delinquencies will most likely lead to increased default rates. Potential economic hardship may trigger a recession which will be advantageous to TMF. Rising interest rates on the existing debt will only worsen this debt crisis. | US credit card debt is at an all time high at $993B as of 5th July 2023.<ref>https://www.foxbusiness.com/economy/credit-card-debt-rising-double-edged-sword-economy</ref> Delinquency rate on credit card loans have been increasing for the sixth consecutive quarter, nearing the pre-pandemic level at 2.43% at Q1 2023.<ref>https://fred.stlouisfed.org/series/DRCCLACBS</ref> Rising debt and its delinquencies will most likely lead to increased default rates. Potential economic hardship may trigger a recession which will be advantageous to TMF. Rising interest rates on the existing debt will only worsen this debt crisis. | ||
[[File:Delinquency1.jpg|left|thumb|482x482px|credit card debt<ref>https://fred.stlouisfed.org/series/CCLACBW027SBOG</ref>, delinquency rates<ref>https://fred.stlouisfed.org/series/DRCCLACBS</ref>]] | |||
The upward trend in delinquency rates on credit card debt typically indicate the beginning of a recession, which was evident in 2000 dot-com crash, 2008 financial crisis and 2020 Covid pandemic. Rapid decrease in delinquency rates after the start of a recession was due to the financial aid or a "bail-out" by the federal reserve by implementing QE and rate cuts to revive the economy. Another upward trend in delinquency rates can be observed from 2021 which may signal the start of a recessionary period in the near future. | |||
[[File:Debt delinquency11.jpg|left|thumb|481x481px|credit card debt<ref>https://fred.stlouisfed.org/series/CCLACBW027SBOG</ref>personal savings rate<ref>https://fred.stlouisfed.org/series/PSAVERT</ref>]] | |||
=== Commercial Real Estate === | === Commercial Real Estate === | ||
Small businesses are in the epicentre of the economic damage from tightened monetary policy. Small business rent delinquency rates have reached 40% in the United States in June, equalling April's record data. <ref>https://thehill.com/business/4073250-small-businesses-struggling-to-make-rent-report/</ref> | |||
Small businesses are in the epicentre of the economic damage from tightened monetary policy. Small business rent delinquency rates have reached 40% in the United States in June, equalling April's record data.<ref>https://thehill.com/business/4073250-small-businesses-struggling-to-make-rent-report/</ref> | |||
== Historical Performance == | |||
[[File:Tmf graph.jpg|left|thumb|752x752px|<ref>https://finance.yahoo.com/quote/%5ETYX/history?period1=1370044800&period2=1689984000&interval=1mo&filter=history&frequency=1mo&includeAdjustedClose=true</ref><ref>https://www.direxion.com/product/daily-20-year-treasury-bull-bear-3x-etfs</ref>]] | |||
TYX indicates the treasury yield of US 30 year Treasury Bond. | |||
== Risk assessment == | == Risk assessment == | ||
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=== Risks as a Leveraged ETF === | === Risks as a Leveraged ETF === | ||
TMF, being a 3x leveraged ETF, comes with a substantial risk as the product is leveraged with derivatives to achieve higher returns. These derivatives include future contracts, swaps and options with high volatility. Leveraged ETFs provide daily return of the desired multiple, and the return resets daily. Compounding returns can bring significant losses or gains. With the considerable risk, TMF is not considered appropriate for long term investment and mostly used for trading.<ref>https://www.investopedia.com/articles/investing/121515/why-3x-etfs-are-riskier-you-think.asp</ref> | TMF, being a 3x leveraged ETF, comes with a substantial risk as the product is leveraged with derivatives to achieve higher returns. These derivatives include future contracts, swaps and options with high volatility. Leveraged ETFs provide daily return of the desired multiple, and the return resets daily. Compounding returns can bring significant losses or gains. With the considerable risk, TMF is not considered appropriate for long term investment and mostly used for trading.<ref>https://www.investopedia.com/articles/investing/121515/why-3x-etfs-are-riskier-you-think.asp</ref> | ||
=== Macroeconomic risks === | === Macroeconomic risks === |