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Given the U.S. economy’s growth momentum, the labor market’s well-being and an uptick in inflation, the Fed now appears on track to hike rates in September. Overall, the U.S. economy grew 4.2% in Q2, beating market forecasts of 4% and representing the fastest pace of growth in nearly four years.
The momentum is upbeat in Q3 too. The chairman of the White House Council of Economic Advisers expects about 3.5% U.S. economic growth for the third quarter, while the Atlanta Federal Reserve’s GDPNow forecast Q3 GDP rate of 4.1%.
U.S. labor costs recorded their largest annual rise since 2008 in the second quarter. U.S. manufacturing activity hit its highest level in August since May 2004. U.S. consumer confidence is hovering around an 18-year high.
Moreover, higher inflationary expectations emanating from tax reform and trade tensions as well as higher crude prices this year should make Fed members comfortable with their pace of rate hikes in the coming days (read: 4 Defensive ETFs to Tackle Fed & Trade Tensions).
As a result, investors are wagering on 99.8% chances of a 25-bp interest rate hike in September, according to CME Group's FedWatch Tool, and a 67.8% chance that rates will rise again by 25 bps in December. If this happens, there will be four Fed rate hikes this year. Apart from these rate hikes, from October 2017, the Fed began unwinding its mammoth $4.5 trillion balance sheet which fattened due to prolonged quantitative easing.
How Are Bond Yields Behaving in 2018?
The U.S. 10-Year Treasury bond yields rose to 2.90% on Sep 4 from 2.86% on Aug 31. In fact, 10- and 30-year Treasury yields saw the largest one-day jump in five weeks on Sep 4. In fact, first-half 2018, 2-year, 10-year and 30-year yields rose 65, 45, and 25 bps, respectively, per a document issued by ProShares.
As a result, bond yields are going up in a rising rate environment, iShares 20+ Year Treasury Bond ETF (TLT) is down 4.4% this year (as of Sep 4, 2018). But there is a way to cash in on this rising yield trend, in the form of inverse Treasury ETFs.
How Do Inverse ETFs Work?
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.
Since most of these funds seek to attain their goals on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark, over a longer period when compared to a shorter period (such as, weeks, months or years) due to the compounding effect (see all Inverse Bond ETFs here).
ETFs to Consider
ProShares Short 20+ Year Treasury ETF (TBF - Free Report)
It seeks to provide 1x inverse (or opposite) exposure to the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. The fund charges 92 bps in fees.
Direxion Daily 20+ Year Treasury Bear 1X Shares
This ETF also offers the inverse returns of the ICE U.S. Treasury 20+ Year Bond Index. The fund charges 45 bps in annual fees.
iPath US Treasury 10-Year Bear ETN
This ETN seeks to deliver inverse returns of the Barclays 10Y US Treasury Futures Targeted Exposure Index, which tracks inverse moves in yields from buying 10-year Treasury bonds. DTYS charges 75 bps in fees per year.
iPath US Treasury Long Bond Bear ETN
This note tracks the inverse returns 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 charges 75 bps in annual fees.
Barclays Inverse US Treasury Composite ETN
The ETN is linked to the performance of the Barclays Inverse US Treasury Futures Composite Index, which deploys a strategy that tracks the sum of the returns of periodically rebalanced short positions in equal face values of each of the two-year, five-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts. The fund charges 43 bps in fees.
iPath US Treasury Flattener ETN
The note is designed to provide investors with inverse exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index.
ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report)
Investors having a more bearish view and a higher risk appetite should keep a watch on TTT. This fund tracks the ICE U.S. Treasury 20+ Year Bond Index. Expense ratio comes in at 0.95%.
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Inverse Bond ETFs to Pick in September
Given the U.S. economy’s growth momentum, the labor market’s well-being and an uptick in inflation, the Fed now appears on track to hike rates in September. Overall, the U.S. economy grew 4.2% in Q2, beating market forecasts of 4% and representing the fastest pace of growth in nearly four years.
The momentum is upbeat in Q3 too. The chairman of the White House Council of Economic Advisers expects about 3.5% U.S. economic growth for the third quarter, while the Atlanta Federal Reserve’s GDPNow forecast Q3 GDP rate of 4.1%.
U.S. labor costs recorded their largest annual rise since 2008 in the second quarter. U.S. manufacturing activity hit its highest level in August since May 2004. U.S. consumer confidence is hovering around an 18-year high.
Moreover, higher inflationary expectations emanating from tax reform and trade tensions as well as higher crude prices this year should make Fed members comfortable with their pace of rate hikes in the coming days (read: 4 Defensive ETFs to Tackle Fed & Trade Tensions).
As a result, investors are wagering on 99.8% chances of a 25-bp interest rate hike in September, according to CME Group's FedWatch Tool, and a 67.8% chance that rates will rise again by 25 bps in December. If this happens, there will be four Fed rate hikes this year. Apart from these rate hikes, from October 2017, the Fed began unwinding its mammoth $4.5 trillion balance sheet which fattened due to prolonged quantitative easing.
How Are Bond Yields Behaving in 2018?
The U.S. 10-Year Treasury bond yields rose to 2.90% on Sep 4 from 2.86% on Aug 31. In fact, 10- and 30-year Treasury yields saw the largest one-day jump in five weeks on Sep 4. In fact, first-half 2018, 2-year, 10-year and 30-year yields rose 65, 45, and 25 bps, respectively, per a document issued by ProShares.
As a result, bond yields are going up in a rising rate environment, iShares 20+ Year Treasury Bond ETF (TLT) is down 4.4% this year (as of Sep 4, 2018). But there is a way to cash in on this rising yield trend, in the form of inverse Treasury ETFs.
How Do Inverse ETFs Work?
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.
Since most of these funds seek to attain their goals on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark, over a longer period when compared to a shorter period (such as, weeks, months or years) due to the compounding effect (see all Inverse Bond ETFs here).
ETFs to Consider
ProShares Short 20+ Year Treasury ETF (TBF - Free Report)
It seeks to provide 1x inverse (or opposite) exposure to the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. The fund charges 92 bps in fees.
Direxion Daily 20+ Year Treasury Bear 1X Shares
This ETF also offers the inverse returns of the ICE U.S. Treasury 20+ Year Bond Index. The fund charges 45 bps in annual fees.
iPath US Treasury 10-Year Bear ETN
This ETN seeks to deliver inverse returns of the Barclays 10Y US Treasury Futures Targeted Exposure Index, which tracks inverse moves in yields from buying 10-year Treasury bonds. DTYS charges 75 bps in fees per year.
iPath US Treasury Long Bond Bear ETN
This note tracks the inverse returns 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 charges 75 bps in annual fees.
Barclays Inverse US Treasury Composite ETN
The ETN is linked to the performance of the Barclays Inverse US Treasury Futures Composite Index, which deploys a strategy that tracks the sum of the returns of periodically rebalanced short positions in equal face values of each of the two-year, five-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts. The fund charges 43 bps in fees.
iPath US Treasury Flattener ETN
The note is designed to provide investors with inverse exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index.
ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report)
Investors having a more bearish view and a higher risk appetite should keep a watch on TTT. This fund tracks the ICE U.S. Treasury 20+ Year Bond Index. Expense ratio comes in at 0.95%.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>