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Higher Yields Raise Appeal for Inverse Treasury ETFs

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The U.S. Treasury yields are surging at the fastest New Year pace in 20 years on Fed’s faster-than-expected policy tightening and skyrocketing inflation. The 10-year yield spiked as much as 1.75% — the highest since March 2021 (read: Treasury Yields Jump to Start New Year: ETFs to Play).

Amid rising yields, 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. These include ProShares Short 20+ Year Treasury ETF (TBF - Free Report) , ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report) , Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report) , ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report) and Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO - 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. All these have witnessed solid gains to start the year.

Yields on the Rise

The latest minutes from the Fed meeting revealed policymakers’ concern about worsening inflation and early interest rate hikes to combat the rising inflation. The policymakers signaled three rate increases this year and three in the following year as inflation concerns deepened. The probabilities of a March interest rate hike of 0.25% surged to 72%, according to fed futures.

Also, the central bank plans to buy $60 billion per month of bonds in combined Treasuries and agency mortgage-backed securities starting in January, down from $90 billion in December and 120 billion from the start of the pandemic through November (read: 5 ETF Predictions for 2022).

Meanwhile, inflation, which measures the increase in the cost of living over time, is running at 6.8% — the highest in nearly four decades. The pandemic-related supply shortages and continued strength in consumer demand continued to push the prices higher. Additionally, the latest U.S. Fed’s preferred inflation gauge increased at the fastest pace in 39 years in November, raising pressure on the central bank to tighten monetary policy.

ETFs to Play

ProShares Short 20+ Year Treasury ETF (TBF - Free Report)

ProShares Short 20+ Year Treasury ETF provides inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index.

ProShares Short 20+ Year Treasury ETF has accumulated $700.2 million in its asset base and charges 92 bps in annual fees. Volume is solid at 1.4 million shares a day on average. The ETF has gained 3.6% this week.

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 $1.4 billion and an average daily volume of 6.8 million shares.

ProShares UltraShort 20+ Year Treasury ETF charges 90 bps in annual fees and is up 7.2% at the start of the year.

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 (see: all the Inverse Bond ETFs here).

With AUM of $366.8 million, Direxion Daily 20+ Year Treasury Bear 3x Shares charges 89 bps in fees and trades in a solid volume of 536,000 shares a day on average. It has surged 10.8% in the first few trading sessions of 2022.

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 $230.2 million and an average daily volume of roughly 144,000 shares. Expense ratio comes in at 0.95%.

ProShares UltraPro Short 20+ Year Treasury ETF has gained 10.5% so far this year.

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.

Direxion Daily 7-10 Year Treasury Bear 3X Shares charges 95 bps in annual fees and trades in an average daily volume of roughly 87,000 shares. It has accumulated $29.7 million in its asset base and has risen 4.6% this week.

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.

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.