The so-called “Great Rotation” from bonds to stocks seems to be taking place after the stunning victory of Republican Donald Trump. While global equities saw increased inflows last week post Trump’s win, the bond market tanked wiping out more than trillion of dollars. This represents the biggest sell-off since the “taper tantrum” in the summer of 2013 (read: Trump Drives Dow to Record High: ETFs in Focus).
Notably, the Bank of America Merrill Lynch's Global Broad Market Index fell 1.18% last week, marking the steepest percentage drop since June 2015 while its U.S. Treasury index suffered the biggest weekly drop of 1.9% since June 2009. The big loss came as Trump’s strategy of ramping up spending and prospects of higher tax cuts stoked fears over soaring U.S. deficit that might result in increased federal debt over the long term.
His strong pledge toward fiscal stimulus and inflationary policies would boost economic growth and increase inflation, prompting the Fed to hike rates in December and expedite lift-offs in 2017 and 2018. As per Bloomberg, chances of a Fed lift-off in December rose to 80% at the end of last week from 76% the week earlier.
The double whammy of expectation of higher debt and rising interest rates led to shockwaves across the global bond market, triggering a massive sell-off not seen in two decades. This is because investors are pulling their money out of the bond market, especially the longer ones as these are more vulnerable to the twin attacks.
Yields Rise All Over
Yields on 10-year U.S. Treasury surged to the highest level of as much as 2.20% since January while the 10-year German Bund yield rose to its highest level of 0.275% in eight months. Yields on British and French government bonds were also higher, with 10-year British gilt yield climbing to the level prior to Britain's decision to leave the European Union. Yield on Italian 10-year securities climbed above 2% for the first time since September 2015.
Further, government bond yields across the Asia-Pacific region also rose with Australia, New Zealand and South Korea rising to their highest levels since at least April. This suggests that the 30-year-old bull run in bonds might finally come to an end (read: ETFs & Stocks That Topped or Flopped After Trump Won).
How to Play?
The rout has resulted in an opportune moment for bond investors to capitalize on beaten down bonds in the form of inverse or leveraged inverse ETFs. For them, we have highlighted six ETFs that could be worth buying for huge gains in a short span.
These products create a short position or leveraged (2x or 3x) short position in the underlying index through the use of swaps, options, futures contracts and other financial instruments. Moreover, these witnessed outsized gains in the last one-week period.
iPath US Treasury 10-Year Bear ETN (DTYS - Free Report)
This ETN seeks to deliver an inverse return of the Barclays 10Y US Treasury Futures Targeted Exposure Index, which tracks inverse moves in yields from buying 10-year Treasury bonds. It is unpopular and illiquid with AUM of $52.5 million and average daily volume of about 40,000 shares. DTYS charges 75 bps in fees per year and surged 29.7% in the last one-week period.
iPath US Treasury Long Bond Bear ETN (DLBS - Free Report)
This note tracks the inverse return 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 has accumulated just $21.4 million in its asset base and charges 75 bps in annual fees. Volume is light, exchanging nearly 7,000 shares in hand on average. DLBS gained about 23% last week (read: Top ETF Stories of October).
ProShares Short 20+ Year Treasury ETF (TBF - Free Report)
This product provides inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index. The index holds 33 securities in its basket. It has an average maturity of 26.53 years and effective duration of 18.45 years. The fund has accumulated $726.3 million in its asset base and charges 94 bps in annual fees. Volume is solid at 722,000 shares on shares a day on average. The ETF was up 7.6% over the past five days.
ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report)
This fund seeks to deliver twice (2x) the inverse performance of the ICE U.S. Treasury 20+ Year Bond Index. TBT is the most popular and liquid option in the inverse bond ETF space with AUM of about $2.3 billion and average daily volume of roughly 2.4 million shares. It charges 93 bps in annual fees and added 15.8% in the same time frame.
ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report)
Investors having a more bearish view and higher risk appetite could find TTT an interesting pick. This fund also tracks the same index but offers three times (3x) inverse exposure. It is often overlooked by investors as depicted by its AUM of $91.6 million and average daily volume of roughly 31,000 shares. Expense ratio comes in at 0.95%. TTT gained 23.5% over the past five days (read: 4 Inverse Bond ETFs to Watch as Rates Rise).
Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report)
This ETF also offers three times (3x or 300%) the inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $450.1 million, the fund charges 89 bps in fees and trades in a solid volume of 853,000 shares a day on average. It gained about 24% in the same timeframe.
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 are bearish on bonds for the near term, either 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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