The fixed income space has been out of investors’ favor this year so far, piling up heavy losses. This is especially true as Treasury yields have been on a rise with two-year yields climbing to its highest level in nearly 10 years at 2.248% and 10-year yields jumping to the highest level in more than four years at 2.9%.
Inside The Surge in Yields
Growing inflationary expectations and a booming economy have led to an uptrend in Treasury yields. In fact, the upbeat U.S. January job data earlier this month ignited fresh fears of inflation and speculation of aggressive monetary policy tightening. Additionally, a spending deal reached by U.S. lawmakers earlier this month has prompted faster-than-expected rates hike. As a result, the Fed might raise interest rates four times than the three moves penciled in for this year.
Global fundamentals are accelerating as Trump’s tax biggest overhaul in decades and a spending spree continue to boost investors’ confidence in the world’s largest economy. China, the world’s second-largest economy, is also doing well. Meanwhile, Eurozone has been growing at the fastest pace in a decade.
Further, new issuance of debt is lifting yields lately. The U.S. Department of Treasury is expected to sell $258 billion worth of debt this week. Out of this, $28 billion debt in 2-year notes was auctioned at a high yield of 2.255%. Given this, 10-year yields are expected to top 3% soon for the first time in many years, especially if Fed minutes turn hawkish.
Against such a backdrop, investors are pulling their money out of the long-term bond market. The rout has resulted in an opportune moment for bond investors to capitalize on beaten-down bonds in the form of inverse or leveraged inverse ETFs. For them, we have highlighted seven ETFs that could be worth buying for huge gains in a short span.
How to Play?
Inverse ETFs provide opposite exposure that is a multiple (-1X, -2X or -3X) of the performance of the underlying index using various investment strategies, such as, swaps, futures contracts and other derivative instruments. All these have witnessed outsized gains so far this year.
ProShares Short 20+ Year Treasury ETF (NYSEARCA:TBF)
This product provides inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index. The index holds 38 securities in its basket with an average maturity of 26.05 years and modified duration of 17.88 years. The fund has accumulated $717.2 million in its asset base and charges 94 bps in annual fees. Volume is solid at 496,000 shares a day on average. The ETF has gained 7.3% so far this year.
Direxion Daily 20+ Year Treasury Bear 1x Shares (NYSEARCA:TYBS)
This ETF also offers inverse return of the ICE U.S. Treasury 20+ Year Bond Index. It has amassed $5.3 million in its asset base and trades in a light volume of 2,000 shares. The fund charges 45 bps in annual fees and has added 7.2% in the same time frame.
iPath US Treasury 10-Year Bear ETN (NASDAQ:DTYS)
This ETN seeks to deliver an inverse return of the Barclays 10Y US Treasury Futures Targeted Exposure Index, which tracks inverse moves in yields from buying 10-year Treasury bonds. It is unpopular and illiquid with AUM of $69.4 million and average daily volume of about 37,000 shares. DTYS charges 75 bps in fees per year and has surged about 26% so far this year.
iPath US Treasury Long Bond Bear ETN (NASDAQ:DLBS)
This note tracks the inverse return of the Barclays Long Bond US Treasury Futures Targeted Exposure Index, which targets the inverse moves in yields from buying long-dated Treasury bonds. It has accumulated just $19.7 million in its asset base and charges 75 bps in annual fees. Volume is light, exchanging nearly 4,000 shares in hand on an average. DLBS has gained about 29.6% in the year-to-date period.
ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT)
This ETF seeks two times (2x or 200%) the inverse daily performance of the ICE U.S. Treasury 20+ Year Bond Index. It is the most popular and liquid ETF in the inverse Treasury space with AUM of $2.2 billion and average daily volume of 2.8 million shares. The fund charges 93 bps in annual fees and is up about 15% in the year-to-date timeframe.
ProShares UltraPro Short 20+ Year Treasury ETF (NYSEARCA:TTT)
Investors having a more bearish view and higher risk appetite could find TTT an interesting pick. This fund also tracks the same index but offers three times (3x or 300%) inverse exposure. It has AUM of $101.5 million and average daily volume of roughly 91,000 shares. Expense ratio comes in at 0.95%. TTT has gained 23% in the year-to-date timeframe.
Direxion Daily 20+ Year Treasury Bear 3x Shares (NYSEARCA:TMV)
This ETF also offers three times the inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $432.4 million, the fund charges 92 bps in fees and trades in a solid volume of 1.1 million shares a day on an average. It has gained about 22% in the same timeframe.
As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may force these products to deviate significantly from the expected long-term performance figures.
Still, for ETF investors who are bearish on Treasuries for the near term, any of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that “trend is the friend” in this corner of the investing world.
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