An ETN to Capitalize on a Steepening Yield Curve
June 21st at 6:30pm by Tom Lydon
With Treasury yields spiking to a two-year high, fixed-income investors are taking a hit, but traders can use exchange traded funds to capitalize on a steepening yield curve.
Treasury yields are adjusting to expectations that the Fed will begin to scale back its asset purchasing program faster-than-expected. [Treasury ETF Lowest Since April 2012 as Yields Spike]
Yields on the benchmark 10-year Treasuries briefly topped 2.5% Friday.
“Bernanke made it clear that tapering QE was on the table,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC, said in a Bloomberg article. “The fact that a QE story has taken out a lot of the bid for stocks has on the margin kept the Treasury sell-off from exacerbating, but in the wake of the Bernanke press conference, the bearish sentiment in the Treasury market appears likely to be with us for a while.”
While some have started to shift over to short-duration fixed-income assets in response to a rising rate environment, investors can also consider the iPath US Treasury Steepener ETN (NYSEArca: STPP) to directly capitalize on rising interest rates.
The STPP exchange traded note has gained 10.5% over the past month. In comparison, the iShares Barclays 7-10 Year Treasury Bond Fund (NYSEArca: IEF) has declined 3.3%.
STPP tries to reflect the performance of the Barclays US Treasury 2Y/10Y Yield Curve Index, which captures the returns that are available from a “steepening” U.S. Treasury yield curve. The ETN has a 0.75% expense ratio.
A curve steepener trade utilizes derivatives, or futures, to capitalize on a widening yield difference that occurs due to an increasing yield curve between two Treasury bonds with varying maturities.
The fund takes a weighted “long” position in 2-year Treasury futures contracts and a weighted “short” position in 10-year Treasury futures. As of May 31, the STPP had 76.8% in 2-year Treasuries and 23.3% in 10-year Treasuries.
For more information on Treasuries, visit our Treasury Bonds category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.