In terms of prices, there was not much to be gained in the fixed-income asset class in 2023, with quotations softening across a broad front. Given monetary policy, this weakness is generally unsurprising: the majority of central banks have been raising interest rates vigorously to ward off the spectre of inflation. Furthermore, bond markets have recently also been generating some momentum of their own. This is particularly true for the USA, because it is known that the Fed suspended the series of interest rate hikes in September. Despite the pause, however, yields continued to rise while US government bonds declined sharply. That also and especially applied for the longer terms. This thesis can be illustrated by the ICE U.S. Treasury 20+ Year Bond Index: from 20 September, the date of the Fed meeting, this benchmark lost more than a tenth of its value within the space of a month.
It is possible that even the US monetary authorities were not entirely comfortable with the rise in yields associated with this price trend. At any rate, a rumour that the Fed could intervene in the market for US government bonds has since done the rounds. What is certain is that prices have recovered somewhat, with the ICE U.S. Treasury 20+ Year Bond Index climbing by up to 8% from its recent low. One reason for the rebound could be the strengthening consensus on a possible turnaround in interest rates next year. Futures markets are now pricing in a reduction of 75 basis points in the Fed target rate for 2024. This expectation naturally depends first and foremost on the further course of inflation and the general economic climate. Another factor is the national budget: the parties in Washington D.C. have until 17 November to amend the “stopgap bill”. If the House of Representatives and the Senate are unable to agree on interim financing, a shutdown looms. Government coming to a halt, and the unforeseeable consequences for the world's largest economy, could in turn undermine the scenario of falling interest rates.
Leonteq has launched an interesting new issue for investors who are thinking about taking a position in US government bonds in light of this background: the outperformance certificate on the iShares $ Treasury Bond 20+yr UCITS ETF. The underlying of this structured product is an exchange traded fund (ETF) on the bond index already mentioned. This currently contains 40 US government bonds with a duration of 20 years or more. A good half of the fund portfolio is allocated to US Treasuries due in 2050 or later. iShares launched this ETF at the start of 2015. The assets under management now amount to USDbn 7.42. The new outperformance certificate offers the prospect of participating disproportionately in rising quotations for the underlying.
The certificate has a two-year term. Should the countermovement of the longer-dated Treasuries prove to be sustainable, the structured product would share in this with an outperformance rate of 140%. Assuming that the underlying appreciates by a fifth over a 24-month period, the certificate would repay 128% of the denomination. Please note that the participation does not kick in fully until the maturity date. Other factors will have an effect on the pricing during the term, including and especially how interest rates in the USA develop. There is no partial or capital protection, so the structured product would participate fully in any downward movement of the ETF. To conclude, the new outperformance certificate offers a good opportunity to take a punt on the interest rate turnaround in the USA and rising prices for long-dated Treasuries with diversification and leverage.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.