The fixed income space, in particular government bond, is gaining immense popularity after losing shine last year. This demand is mainly driven by falling interest rates even with lesser Fed bond buying. Notably, yields on 10-year Treasury notes are at the lowest levels seen this year, propelling the bond prices higher.
Additionally, the ongoing political turmoil across the globe has prompted investors to take a flight to safety. Long-term bonds are the major beneficiaries of this trend and this is likely to continue at least in the near term given the growing tension in Russia for invading Ukraine and violence in Middle East (read: 3 Ultra Safe Bond ETFs to Dodge Market Turmoil).
In such a backdrop, inverse funds providing opposite exposure to the performance of the Treasury notes have piled up heavy losses so far in the year. And, the new product – Barclays Inverse US Treasury Aggregate ETN ((TAPR - ETF report) ) – is no exception.
TAPR in Focus
The note provides investors a unique strategy to hedge against or benefit from rising U.S. dollar interest rates by tracking the Barclays Inverse US Treasury Futures Aggregate Index. This benchmark employs a strategy, which follows the sum of the returns of the periodically rebalanced short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts.
With that being said, if the price of each Treasury futures contract increases or decreases by 1% of its face value then the value of index would decrease or increase by 5% over the same period.
The ETN was launched on July 15 and has about $23.3 million in net assets. It charges 43 bps in annual fees and trades in light volume of about 2,000 shares per day on average, ensuring additional cost in the form of a wide bid/ask spread. The note lost nearly 10.7% in its one month of debut.
TAPR is the only product in the ETF space that offers inverse exposure to all five tenors on the US Treasury futures curve using a single instrument (read: Play Rising Rate Concerns with This New Inverse ETF).
What Lies Ahead?
With the pickup in U.S. economic activity, accelerating momentum in the manufacturing and service industries, healthy labor market, improving housing market, and rising consumer confidence, the U.S. stock market is expected to move higher.
The S&P 500 crossed the major milestone of 2,000 while Dow Jones exceeded 17,100 this week, suggesting greater complacency in the stock market and lower volatility. This would continue to dampen the appeal for the bond markets going forward (see: all the Inverse Bond ETFs here).
Further, concerns are rising over the potential interest rate hike sooner than expected, even though the Fed still expects to keep the short-term interest rates near zero until mid 2015. If these expectations come true, TAPR will certainly get a boost in the coming months.
Though the positive domestic developments will likely attract riskier investments, the global economy is suffering from a slowdown reflecting equity returns at risk. This is especially true, as the Russia-Ukraine standoff is showing no signs of easing, Europe is struggling to boost growth and inflation, China is showing uncertain recovery and Japan failed to sustain the winning momentum from Abenomics (read: 3 ETFs in Focus on Escalating Russia/Ukraine Tensions).
In case global worries aggravate, these would put a cap on interest rate increase by the Fed and send investors to safe haven avenues, including Treasuries. This would continue to depress all the inverse Treasury ETFs.
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