New Trade for November 10th, 2021

This morning, investors were cautious after the major indices broke their winning streaks to finish yesterday’s session lower.  The move came on the heels of another hot inflation reading.  Yesterday the Labor Department reported an 8.6% increase for the producer price index from October one year ago – the hottest annual increase on record in 11 years.  

This morning, October’s consumer price index reading indicated a 6.2% jump year-over-year, well above the expected 5.9%.  Consequently, tech shares fell as Treasury yields rose.  

“Investor worries came to the fore again today,” said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Company. “The inflation narrative is still out there and needs to be resolved.  We think investors will see inflation abate in the coming months as the Fed remains accommodative, people come back into the workforce, and consumers shift from buying goods to services.”   

Today we’ll cover a trick used by the pros when they sense that inflation might be cooling down.  This trick could be highly useful for active investors who agree with Schutte and think that inflation is at or near its peak and a cool-down period is coming. 

When inflation shows signs of cooling down, one way to play the move is through the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF).  The fund provides daily leveraged (3x) exposure to the ICE U.S. Treasury 20+ Year Bond Index.  Using a combination of swaps and futures, giving investors 3x exposure to daily moves in T-bonds with more than 20 years left to maturity.  The fund has been on the move higher as inflation fears begin to dissipate.  As such, TMF has risen 20% over the last month.

“Policymakers have consistently argued that a surprisingly strong burst of inflation this year has been tied to pandemic-related quirks and should prove temporary, and most economists agree that prices will climb more slowly as businesses adjust and supply chains return to normal,” a New York Times article said. “The major question hanging over the economy’s future has been how much and how quickly the jump will fade.”

TMF shares may slip as investors react to today’s reading and possible hot reading in the future, which makes now a good time to monitor the fund.  

Keep in mind; the fund resets daily, so investors shouldn’t expect the leverage factor to hold constant over investment horizons greater than one day.  In short, the fund is a valid option for tactical positioning/hedging against rising interest rates. Still, it’s essential to keep in mind that the 3x leverage results in a more significant impact from the effects of compounding.  TMF can be a powerful tool for active investors but should be avoided by those with a low-risk tolerance or a buy-and-hold strategy. 

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