Investors Looking Past Omicron Could Push Yields Higher, Bonds Lower – ETF Trends

Investors Looking Past Omicron Could Push Yields Higher Bonds Lower


Even as COVID-19 cases start to rise due to the more contagious Omicron variant, investors may be looking past the associated market risks.

As the Dow Jones Industrial Average moves higher after last week’s volatility, the bond markets are responding favorably. Yields are ticking higher and bond prices are moving lower, potentially signaling a move from safe haven assets.

“Omicron is a threat, but it’s not going to derail things,” said Tufts University economist Brian Bethune.

While the variant may be more contagious than the previous Delta variant, the notion is that symptoms are often more mild. As the markets continue to digest COVID news, more confidence could be building, which could result in a year-end rally.

“The market seems to be reacting to a short-term oversold position,” said Timothy Lesko, principal at Granite Investment Advisors. “Omicron and its unknown effect is creating significant volatility. Bonds were over bought, stocks were over sold and now we seek to find answers.”

“If omicron-induced illness remains mild, which seems to be of some debate, we could see a rally,” Lesko added.

2 ETFs to Trade the Moves

Yields react conversely with bond prices, and traders can play the moves with a pair of inverse funds from Direxion Investments. Both ETFs use benchmark Treasury yields in the shorter-term seven- to 10-year maturity dates and the longer-term 20-plus maturity dates.

First off, there’s the Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO), which seeks daily investment results before fees and expenses of 300% of the inverse (or opposite) of the daily performance of the ICE U.S. Treasury 7-10 Year Bond 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 10 years.

Next, traders can use the Direxion Daily 20+ Yr Trsy Bear 3X ETF (TMV), which seeks daily investment results equal to 300% of the inverse of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. TMV invests in swap agreements, futures contracts, short positions, or other financial instruments that provide inverse or short leveraged exposure to the index, which is a market value-weighted index that includes publicly issued U.S. Treasury debt securities that have a remaining maturity of greater than 20 years.

TYO Chart

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