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.