The U.S. Treasury market has been out of investors’ favor, piling up heavy losses lately. This is especially true as Treasury yields have been on the rise with the 10-year yield climbing to above 1.50%. The prospect of the Fed’s policy tightening as well as persistent high inflation are driving the yields higher.
Notably, the Bloomberg US Treasury Total Return index is headed for the first yearly loss since 2013 and is down about 2% so far this year. Fed Chair Jerome Powell signaled the tapering of bond buying followed by interest rate hikes as early as next year. The central bank is expected to begin scaling back the monthly bond purchases as soon as next month and complete the process by mid-2022. The policy statement also revealed that nine of 18 Fed policymakers foresee a liftoff in interest rates next year, compared to seven policymakers in June. The median dot also projects three to four total rate hikes by the end of 2023. Through the end of 2024, the median FOMC member sees six to seven total rate hikes (read: ETFs to Bet On as Fed Turns Hawkish, Signals Tapering). Meanwhile, inflation, which measures the increase in the cost of living over time, is running at 5.3% — the highest in nearly 13 years — driven by surging consumer demand, rising energy prices, and supply chain-related shortages. Additionally, the latest U.S. Fed’s preferred inflation gauge rose 3.6% in August from the year-ago month, representing the biggest jump since 1991. This has fueled concerns that price increases will last longer than expected and eventually hit consumer spending. Additionally, a spike in commodity prices, especially oil and metals, as well as the wider reach of COVID-19 vaccinations has lifted inflationary expectations. Against such a backdrop, investors should put their money in ETFs that bet against U.S. Treasury bonds. For them, we have highlighted some inverse or leveraged inverse 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 solid gains so far this year.
ProShares Short 20+ Year Treasury ETF ( TBF Quick Quote TBF - Free Report) This product provides inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index. The index holds 40 securities in its basket with an average maturity of 25.90 years and modified duration of 18.80 years. The fund has accumulated $789.2 million in its asset base and charges 94 bps in annual fees. Volume is solid at 1.5 million shares a day on average. The ETF has gained about 6% so far this year (read: ETF Strategies to Play Rising U.S. Treasury Yields). ProShares UltraShort 20+ Year Treasury ETF ( TBT Quick Quote TBT - Free Report) 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 $1.5 billion and an average daily volume of 4.6 million shares. The fund charges 92 bps in annual fees and is up 12.5% in the year-to-date timeframe. Direxion Daily 20+ Year Treasury Bear 3x Shares ( TMV Quick Quote TMV - Free Report) This ETF offers three times the inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $329.6 million, the fund charges 89 bps in fees and trades in a solid volume of 366,000 shares a day on average. It has surged 16.5% in the same timeframe. ProShares UltraPro Short 20+ Year Treasury ETF ( TTT Quick Quote TTT - Free Report) This fund also offers three times the inverse performance of the same index. It has AUM of $125 million and an average daily volume of roughly 101,000 shares. Expense ratio comes in at 0.95%. TTT has gained 17.5% so far this year. Direxion Daily 7-10 Year Treasury Bear 3X Shares ( TYO Quick Quote TYO - Free Report) This product provides three times the inverse performance of the ICE U.S. Treasury 7-10 Year Bond Index. The index holds bonds with an average maturity of 8.61 years and a modified duration of 8.01 years. TYO charges 95 bps in annual fees and trades in an average daily volume of roughly 67,000 shares. It has accumulated $26.4 million in its asset base and has risen 9.5% this year. ProShares UltraShort 7-10 Year Treasury ( PST Quick Quote PST - Free Report) This fund 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 $67 million, the fund trades in volume of 56,000 shares a day on average and is up 5.3% in the same timeframe. ProShares Short 7-10 Year Treasury ( TBX Quick Quote TBX - Free Report) This fund provides inverse the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index, charging 95 bps in annual fees. It has AUM of $102.3 million and an average daily volume of roughly 60,000 shares. Expense ratio comes in at 0.95%. TBX has gained 2.3% so far this year. 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 at least in 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.