Soaring yields once again took all the sheen away from the U.S. Treasury market. This is especially true as 10-year yields jumped to the highest level since 2011 at 3.23% backed by a slew of upbeat economic data.
August job data last week showed that the rate of unemployment fell to 3.7% for the first time in nearly 50 years, while the Institute for Supply Management revealed that the U.S. services sector expanded at its fastest pace on record in September. The ISM non-manufacturing index also rose to 61.6 last month, the highest level since the index was created in 2008. Additionally, the National Federation of Independent Business’ small-business sentiment gauge is at its highest level since it started 44 years ago. The combination of the data has led to inflationary pressure, which in turn fueled speculation of faster-than-expected rates hike from the Federal Reserve, pushing bond yields higher (read: September U.S. Job Data Mixed: ETFs That Gained).
Further, the spike came amid escalating worries over the United States and China’s trade clash that could drive inflation higher, thereby pushing Treasuries down.
Moreover, hawkish comments from Federal Reserve policymakers have added to the strength in yields. Federal Reserve Chairman Jerome Powell said the central bank is “a long way” from getting rates to neutral, a fresh sign of further hikes. He further added that the ultra-accommodative policy to bring the economy out of the Great Recession is no longer needed. The central bank, which started tightening monetary policy in 2015, has raised rates thrice this year and is expected to do so again in December.
Against such a backdrop, investors are putting their money in ETFs that bet against U.S. Treasury bonds. For them, we have highlighted seven 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 outsized gains so far this year.
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 25.93 years and modified duration of 17.63 years. The fund has accumulated $549.3 million in its asset base and charges 91 bps in annual fees. Volume is good at 391,000 shares a day on average. The ETF has gained 3.5% over the past week (read: Treasury Yields at New 7-Year High: ETF Strategies to Play).
This ETF also offers inverse return of the ICE U.S. Treasury 20+ Year Bond Index. It has amassed $5.5 million in its asset base and trades in light volume of 3,000 shares. The fund charges 45 bps in annual fees and has added 3.8% in the same time frame.
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 $69 million and average daily volume of about 32,000 shares. DTYS charges 75 bps in fees per year and has added 5.2% over the past week.
This note tracks the inverse returns 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 $21.7 million in its asset base and charges 75 bps in annual fees. Volume is light, exchanging nearly 4,000 shares in hand on average. DLBS has gained about 8.6% over the past week.
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 $1.8 billion and average daily volume of 2.6 million shares. The fund charges 89 bps in annual fees and is up about 6.9% over the past week.
Investors having a more bearish view and a 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 $89.4 million and average daily volume of roughly 107,000 shares. Expense ratio comes in at 0.95%. TTT has gained 9.4% over the past week (read: Inverse Bond ETFs to Pick in September).
This ETF offers three times inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $385.7 million, the fund charges 90 bps in fees and trades in solid volume of 746,000 shares a day on average. It has surged 9.4% over the past week.
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 the trend is a friend in this corner of the investing world.
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