TMV: Leveraged Fund Offering -3x Treasuries Returns

Summary

• TMV is a highly speculative investment vehicle.
• The fund had a volatile 2021 performance that peaked at almost +60% in March 2021 on the back of higher 30-year rates.
• The fund seeks the -3x daily return of the ICE U.S. Treasury 20+ Year Bond Index.

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Thesis

The Direxion Daily 20+ Year Treasury Bull & Bear 3X Shares (NYSEARCA:TMV) seek daily investment results, before fees and expenses, of 300% of the inverse (or opposite), of the performance of the ICE U.S. Treasury 20+ Year Bond Index. The ICE Index is market value weighted and is designed to measure the performance of U.S. dollar-denominated, fixed rate securities with minimum term to maturity greater than twenty years. As the Fed finalizes its asset taper and yields move up, bond price decrease and TMV is designed to capture 300% of that move. Just like any other leveraged product this is not a buy-and-hold vehicle, but a very short term speculative instrument designed for sophisticated investors to take advantage of abnormal and overshooting long end bond rate movements. Investors with high duration portfolios who feel there will bouts of inflation driven rate moves can also use this instrument for very short periods of time to hedge some of their portfolios' rates deltas. In order to be Bullish TMV look for bouts of volatility in long end rates, with a 3% year end 2022 target in mind, and utilize TMV for shorter dated trades when there are arbitrage opportunities (temporary risk sell-offs when market participants pile into Treasuries for example).

Composition and Holdings

The Direxion fund TMV was started in 2009 and has quite a high management fee of 1.01%. The assets under management are approximately $350mm. The fund replicates the index duration and maturity profile:

Source: Direxion

As we can observe the duration hovers around the 20-year mark with the weighted average maturity being higher at around 26 years. The fund holds bonds in different maturity buckets, evenly split in the 20-24 and 24-27 years bucket, whilst the highest concentration of securities reside in the 27-30 year bucket:

Source: Direxion

The fund achieves its desired leveraged exposure through swap contracts rather than holding any securities outright.

Performance

Let us now have a look at how the fund performed during 2021, when rates had a period of higher repricing. As 30-year rates moved up by approximately 0.75% in the beginning of 2021, TMV shot up to an almost +60% return:

Source: Author

Let us have a look and decompose this performance further.

Source: Vanguard

TMV falls in the long-term duration profile, hence from the above table we can see that an increase in rates by 100 bps (i.e. 1%) would bring an approximate -12% decrease to a long bond fund, hence a +12% increase to a short bond fund. As we saw above 30-year rates moved by 0.75% from January 2021 to March 2021. If this move had happened during one day only, the math would say that TMV would need to be up 12% x 0.75 x 3 = 27%. However, the fund seeks 3x of the daily investment results of the index, meaning it tends to magnify both moves up, as well as moves down. That is why the fund is down almost -77% in the past five years although long term rates have not moved by an equivalent magnitude:

Source: Seeking Alpha

In effect 30-year rates have stayed in a 3%-1% band:

Source: The Fed

The takeaway here is that leveraged vehicle, especially 3x type of funds, are short term speculative tools only. Long term (1 year and above) they tend to lose value because of the high management fees and the stated goal of matching daily moves in the underlying index / stocks.

How to use TMV

In our opinion TMV is best used with a maximum 6-month maturity window in mind. 2022 is bound to be a volatile year, marked by an accelerated inflation picture and a potentially aggressive Fed. If you are running a high duration asset portfolio (be it equities or fixed income) and you are comfortable with the long term fundamentals and returns of said asset portfolio, but you are worried about temporary drawdowns due to rate increases then you might need to consider TMV. As we saw in 2021 timing is key, and holding the fund for the entire year would have not generated the requisite return. Look for bouts of volatility in long end rates, with a 3% year end 2022 target in mind for long end rates and utilize TMV for shorter dated trades when there are arbitrage opportunities (temporary risk sell-offs when market participants pile into Treasuries for example)

Past Fed cycle timeline reminder

Let us have a look on how the past Fed tightening cycle progressed:

• May 2013: Ben Bernanke first alluded to tapering
• December 2013: Fed announced the tapering of bond buying by $10 billion a month

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• October 2014: Fed completes tapering

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• December 2015: The Fed raised interest rates by 0.25 percentage points to a 0.25% - 0.50% target range

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• December 2016: After one year the Fed raised rates again to a 0.50% - 0.75% target range, with unemployment dipping

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• March 2017: Rates rise again to a target rate of 0.75% - 1.00% on the back of a strong job market
• June 2017: Rates target moved to 1.00% - 1.25%
• December 2017: Rates target moved higher to 1.25% - 1.50%

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• March 2018: Under the new leadership of Jerome Powell the Fed raises rates to a range of 1.5% - 1.75%
• June - December 2018: Rates moved higher progressively to 2.5%

Conclusion

TMV falls in the leveraged funds suite of products and is not a long term buy-and-hold vehicle. Have a maximum 6-months holding period in mind and take advantage of bouts of volatility if you need to hedge your long duration portfolios. As the Fed ends its taper program and raises rates, opportunities will abound for this speculative vehicle to generate substantial returns.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Will McCrady]

Thanks for the article. I generally agree TMV is a good short term hedge. However, your comparison to past Fed cycles is somewhat misplaced. The biggest difference between this cycle and May '13 is white hot inflation. 5-6% inflation is still seen by most to be transitory. If inflation continues at current pace -as I believe it will, the yield on the long bond will explode.

[RettW]

Here is a better How To Use than throwing darts at moving Fed Policy:
Adaptive Asset Allocation
Tickers: TMV,LTPZ,IEF,TLT
Performance period 36 days
Inverse volatility period 6 months
Assets to hold 3
Trade at end of month
Apr 2010-Dec 2021
Avg 6.4% SD 6.7%
Sortino ratio 1.84
Market correlation -0.38
More conservative result when substituting IEI for IEF.
Probably will perform better this year than last.

[Binary Tree Analytics]

@RettW hi - thanks for the comment. your strategy trades the entire yield curve rather than the long end - i am not saying one is better than another, just that the article addresses the long end / long duration lens