The U.S. Treasury market has been out of investors’ favor this year, piling up heavy losses. This is especially true as Treasury yields have been on the rise with two-year yields climbing to its highest level since August 2008 at 2.593% and 10-year yields jumping to 3.093% - a level not seen since July 2011 (read: ETFs to Benefit or Lose from Rising Yields).
Inside The Surge in Yields
Growing inflationary expectations are raising speculations of faster-than-expected rates hike from the Federal Reserve, pushing bond yields higher. Inflation, which has been mysteriously low for years, has accelerated in recent months, with expectations hovering near the highest level since 2014.
This is due to a rise in energy prices, increase in raw material costs and a historically low unemployment rate, which suggests that wages could finally pick up. Additionally, the latest April retail sales data, which showed a 0.3% increase in sales and an upward revision in February and March sales, indicates firmer inflation.
Further, the spike came amid renewed worries over the United States and China trade clash that could push prices and inflation higher, thereby pushing the Treasuries down.
Against such a backdrop, investors are pulling their money out of the long-term bond market.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 seven ETFs that could be worth buying for huge gains in a short span (read: What's Impacting Treasury ETFs?).
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 outsized gains so far this year. In fact, most of them are trading at a new one-year high.
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 38 securities in its basket with an average maturity of 25.98 years and modified duration of 17.66 years. The fund has accumulated $641.4 million in its asset base and charges 94 bps in annual fees. Volume is solid at 607,000 shares a day on average. The ETF has gained 7.8% so far this year.
Direxion Daily 20+ Year Treasury Bear 1x Shares (TYBS - Free Report)
This ETF also offers inverse return of the ICE U.S. Treasury 20+ Year Bond Index. It has amassed $5.3 million in its asset base and trades in a light volume of 1,000 shares. The fund charges 45 bps in annual fees and has added 6.2% in the same time frame.
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 $67 million and average daily volume of about 51,000 shares. DTYS charges 75 bps in fees per year and has surged about 35% so far this year.
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 $20.5 million in its asset base and charges 75 bps in annual fees. Volume is light, exchanging nearly 6,000 shares in hand on an average. DLBS has gained about 34.3% in the year-to-date period (read: Win From Rising Rates With These 4 ETF Strategies).
ProShares UltraShort 20+ Year Treasury ETF (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 $2 billion and average daily volume of 3.3 million shares. The fund charges 93 bps in annual fees and is up about 15.3% in the year-to-date timeframe.
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 or 300%) inverse exposure. It has AUM of $96.2 million and average daily volume of roughly 115,000 shares. Expense ratio comes in at 0.95%. TTT has gained 23.3% in the year-to-date timeframe.
Direxion Daily 20+ Year Treasury Bear 3x Shares (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 $404.4 million, the fund charges 95 bps in fees and trades in a solid volume of 1.2 million shares a day on average. It has gained about 22.3% 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 Treasuries for 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.
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