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Inverse Treasury ETFs Soar as Yields See Big Monthly Gain
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Treasury yields logged the biggest monthly gain in February since September and October on prospects of tighter monetary policy for longer than expected. The 10-year yields topped 4%, marking the highest level since November, while 2-year yields reached its highest level since November to about 4.8%. The 6-month yield rose to above 5%, just shy of its highest level since Mar 12, 2007 (read: Rising Rate ETF Outperforms in February: Here's Why).
This has led to a spike in ETFs that bet against U.S. Treasury bonds. While most of the inverse ETFs have been riding higher, ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report) and Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report) are the show stealers with nearly 15% returns last month. This is followed by gains of 10.6% for Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO - Free Report) , 10.2% for ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report) , and 7.2% for ProShares UltraShort 7-10 Year Treasury ETF (PST - Free Report) .
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. These ETFs could be worth buying for huge gains in a short span arising from rising yields.
The rise in yields came on the back of a series of solid economic data, which has rekindled concerns that interest rates could keep climbing for longer than anticipated. This is especially true as U.S. consumer spending increased the most in nearly two years in January and retail sales also increased the most in nearly two years in January after two straight monthly declines. Hiring surged with the economy adding a solid 517,000 jobs in January. The unemployment rate fell from 3.5% to 3.4%, the lowest since 1969. Business activity unexpectedly rebounded in February, reaching its highest level in eight months.
The housing market is showing signs of improvement. U.S. builder confidence has risen for the second consecutive month to the highest level since September 2022. Signed contracts to buy existing homes in the United States rose the most since June 2020 in January.
Meanwhile, the Fed’s preferred inflation gauge accelerated in January at its fastest pace since June, while the consumer price index jumped 0.5% in January following a 0.1% increase in December. Both gauges have shown rising inflation and will thus prompt the central bank to raise interest rates to an even higher peak level and hold them there through the year (read: PCE Inflation Jumps the Most Since June: 5 ETFs to Play).
According to the CME FedWatch tool, markets are pricing in a 76.7% probability that the Fed will raise interest rates by 25 bps to a range of 4.75% to 5% on Mar 22.
ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report)
ProShares UltraPro Short 20+ Year Treasury ETF also offers three times the inverse performance of the same index. It has AUM of $371.5 million and an average daily volume of roughly 97,000 shares. The expense ratio comes in at 0.95%.
Direxion Daily 20+ Year Treasury Bear 3x Shares offers three times the inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $514.2 million, Direxion Daily 20+ Year Treasury Bear 3x Shares charges 88 bps in fees and trades in a solid volume of 320,000 shares a day on average.
Direxion Daily 7-10 Year Treasury Bear 3X Shares provides three times the inverse performance of the ICE U.S. Treasury 7-10 Year Bond Index. It charges 95 bps in annual fees and trades in an average daily volume of roughly 74,000 shares. Direxion Daily 7-10 Year Treasury Bear 3X Shares has accumulated $30 million in its asset base.
ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report)
ProShares UltraShort 20+ Year Treasury ETF seeks two times 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 $744.2 million and an average daily volume of 3.1 million shares. ProShares UltraShort 20+ Year Treasury ETF charges 89 bps in annual fees.
ProShares UltraShort 7-10 Year Treasury (PST - Free Report)
ProShares UltraShort 7-10 Year Treasury seeks to offer two times the inverse the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index, charging 95 bps in annual fees. With AUM of $47.4 million, the fund trades in a volume of 67,000 shares a day on average.
Bottom Line
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 (see: all the Inverse Bond ETFs here).
Still, for ETF investors who believe that yields will continue to rise, 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 the trend is the friend in this corner of the investing world.
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Inverse Treasury ETFs Soar as Yields See Big Monthly Gain
Treasury yields logged the biggest monthly gain in February since September and October on prospects of tighter monetary policy for longer than expected. The 10-year yields topped 4%, marking the highest level since November, while 2-year yields reached its highest level since November to about 4.8%. The 6-month yield rose to above 5%, just shy of its highest level since Mar 12, 2007 (read: Rising Rate ETF Outperforms in February: Here's Why).
This has led to a spike in ETFs that bet against U.S. Treasury bonds. While most of the inverse ETFs have been riding higher, ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report) and Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report) are the show stealers with nearly 15% returns last month. This is followed by gains of 10.6% for Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO - Free Report) , 10.2% for ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report) , and 7.2% for ProShares UltraShort 7-10 Year Treasury ETF (PST - Free Report) .
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. These ETFs could be worth buying for huge gains in a short span arising from rising yields.
The rise in yields came on the back of a series of solid economic data, which has rekindled concerns that interest rates could keep climbing for longer than anticipated. This is especially true as U.S. consumer spending increased the most in nearly two years in January and retail sales also increased the most in nearly two years in January after two straight monthly declines. Hiring surged with the economy adding a solid 517,000 jobs in January. The unemployment rate fell from 3.5% to 3.4%, the lowest since 1969. Business activity unexpectedly rebounded in February, reaching its highest level in eight months.
The housing market is showing signs of improvement. U.S. builder confidence has risen for the second consecutive month to the highest level since September 2022. Signed contracts to buy existing homes in the United States rose the most since June 2020 in January.
Meanwhile, the Fed’s preferred inflation gauge accelerated in January at its fastest pace since June, while the consumer price index jumped 0.5% in January following a 0.1% increase in December. Both gauges have shown rising inflation and will thus prompt the central bank to raise interest rates to an even higher peak level and hold them there through the year (read: PCE Inflation Jumps the Most Since June: 5 ETFs to Play).
According to the CME FedWatch tool, markets are pricing in a 76.7% probability that the Fed will raise interest rates by 25 bps to a range of 4.75% to 5% on Mar 22.
ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report)
ProShares UltraPro Short 20+ Year Treasury ETF also offers three times the inverse performance of the same index. It has AUM of $371.5 million and an average daily volume of roughly 97,000 shares. The expense ratio comes in at 0.95%.
Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report)
Direxion Daily 20+ Year Treasury Bear 3x Shares offers three times the inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $514.2 million, Direxion Daily 20+ Year Treasury Bear 3x Shares charges 88 bps in fees and trades in a solid volume of 320,000 shares a day on average.
Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO - Free Report)
Direxion Daily 7-10 Year Treasury Bear 3X Shares provides three times the inverse performance of the ICE U.S. Treasury 7-10 Year Bond Index. It charges 95 bps in annual fees and trades in an average daily volume of roughly 74,000 shares. Direxion Daily 7-10 Year Treasury Bear 3X Shares has accumulated $30 million in its asset base.
ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report)
ProShares UltraShort 20+ Year Treasury ETF seeks two times 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 $744.2 million and an average daily volume of 3.1 million shares. ProShares UltraShort 20+ Year Treasury ETF charges 89 bps in annual fees.
ProShares UltraShort 7-10 Year Treasury (PST - Free Report)
ProShares UltraShort 7-10 Year Treasury seeks to offer two times the inverse the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index, charging 95 bps in annual fees. With AUM of $47.4 million, the fund trades in a volume of 67,000 shares a day on average.
Bottom Line
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 (see: all the Inverse Bond ETFs here).
Still, for ETF investors who believe that yields will continue to rise, 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 the trend is the friend in this corner of the investing world.