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Inverse Treasury ETFs Spike as March Rate Cut Bets Recede
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The solid economic data and the Fed’s no rush to cut rates stance have brought back the “higher-for-longer" theme in interest rates and expectations of fewer-than-expected rate cuts this year. This has pushed Treasury yields up, leading to a bloodbath in U.S. Treasury bonds.
In fact, the long-dated Treasuries posted their biggest two-day loss in months as 10-and 30-year yields jumped by the maximum over the past two trading sessions than any time since June 2022 and March 2020, respectively. This led to a surge in ETFs that bet against U.S. Treasury bonds on Feb 5 trading session (read: 4 ETF Zones to Invest in as Fed Signals No Rate Cuts in March).
Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report) and ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report) were the biggest beneficiaries of the trend, rising 6% each. This was followed by gains of 4% for ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report) , 3.1% for Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO - Free Report) and 2% for ProShares Short 20+ Year Treasury (TBF - 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.
Behind the Slump in Treasuries
The Institute for Supply Management’s services gauge shows that the U.S. services sector expanded at a faster pace in January and grew for the 13th consecutive month. This indicates that the world’s largest economy remains on solid footing, dampening the prospect of imminent rate cuts.
In a CBS interview on "60 Minutes," Fed Chair Jerome Powell vowed that the central bank will proceed carefully with interest rate cuts this year and will likely move at a considerably slower pace than market expectations.
Powell expressed confidence in the economic growth and jobs market. The economy grew at a much more rapid pace than expected, with GDP rising at a 3.3% annualized rate in the fourth quarter of 2023, up from the Wall Street consensus estimate growth rate of 2%. The economy added 353,000 new jobs in January, while unemployment remained at 3.7%. Average hourly pay is also rising, with the fastest monthly gain in nearly two years in January (read: U.S. GDP Growth Beats Expectations in Q4: ETFs to Benefit).
Traders have been scaling back rate cuts bets since the beginning of the year and are currently pricing in only a 15% chance of a cut in March, the CME FedWatch tool showed, compared with a 69% chance at the start of the year. They are also now pricing in 115 basis points (bps) of cuts this year, compared with around 150 bps of easing anticipated in early January.
Direxion Daily 20+ Year Treasury Bear 3x Shares offers three times the inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index. With AUM of $223.5 million, Direxion Daily 20+ Year Treasury Bear 3x Shares charges 88 bps in fees and trades in a solid volume of 1.5 million shares a day on average.
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 ICE U.S. Treasury 20+ Year Bond Index. It has AUM of $49 million and an average daily volume of roughly 37,000 shares. The expense ratio comes in at 0.95%.
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 $322.8 million and an average daily volume of 2.3 million shares. ProShares UltraShort 20+ Year Treasury ETF charges 89 bps in annual fees.
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 38,000 shares. Direxion Daily 7-10 Year Treasury Bear 3X Shares has accumulated $16.5 million in its asset base.
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. It has accumulated $99 million in its asset base and charges 90 bps in annual fees. Volume is solid at 602,000 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 Spike as March Rate Cut Bets Recede
The solid economic data and the Fed’s no rush to cut rates stance have brought back the “higher-for-longer" theme in interest rates and expectations of fewer-than-expected rate cuts this year. This has pushed Treasury yields up, leading to a bloodbath in U.S. Treasury bonds.
In fact, the long-dated Treasuries posted their biggest two-day loss in months as 10-and 30-year yields jumped by the maximum over the past two trading sessions than any time since June 2022 and March 2020, respectively. This led to a surge in ETFs that bet against U.S. Treasury bonds on Feb 5 trading session (read: 4 ETF Zones to Invest in as Fed Signals No Rate Cuts in March).
Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report) and ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report) were the biggest beneficiaries of the trend, rising 6% each. This was followed by gains of 4% for ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report) , 3.1% for Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO - Free Report) and 2% for ProShares Short 20+ Year Treasury (TBF - 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.
Behind the Slump in Treasuries
The Institute for Supply Management’s services gauge shows that the U.S. services sector expanded at a faster pace in January and grew for the 13th consecutive month. This indicates that the world’s largest economy remains on solid footing, dampening the prospect of imminent rate cuts.
In a CBS interview on "60 Minutes," Fed Chair Jerome Powell vowed that the central bank will proceed carefully with interest rate cuts this year and will likely move at a considerably slower pace than market expectations.
Powell expressed confidence in the economic growth and jobs market. The economy grew at a much more rapid pace than expected, with GDP rising at a 3.3% annualized rate in the fourth quarter of 2023, up from the Wall Street consensus estimate growth rate of 2%. The economy added 353,000 new jobs in January, while unemployment remained at 3.7%. Average hourly pay is also rising, with the fastest monthly gain in nearly two years in January (read: U.S. GDP Growth Beats Expectations in Q4: ETFs to Benefit).
Traders have been scaling back rate cuts bets since the beginning of the year and are currently pricing in only a 15% chance of a cut in March, the CME FedWatch tool showed, compared with a 69% chance at the start of the year. They are also now pricing in 115 basis points (bps) of cuts this year, compared with around 150 bps of easing anticipated in early January.
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 ICE U.S. Treasury 20+ Year Bond Index. With AUM of $223.5 million, Direxion Daily 20+ Year Treasury Bear 3x Shares charges 88 bps in fees and trades in a solid volume of 1.5 million shares a day on average.
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 ICE U.S. Treasury 20+ Year Bond Index. It has AUM of $49 million and an average daily volume of roughly 37,000 shares. The expense ratio comes in at 0.95%.
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 $322.8 million and an average daily volume of 2.3 million shares. ProShares UltraShort 20+ Year Treasury ETF charges 89 bps in annual fees.
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 38,000 shares. Direxion Daily 7-10 Year Treasury Bear 3X Shares has accumulated $16.5 million in its asset base.
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. It has accumulated $99 million in its asset base and charges 90 bps in annual fees. Volume is solid at 602,000 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.