In a rising interest rate environment, Treasury bond prices have been taking a beating. More aggressive investors, though, can take advantage of the unfortunate turn with inverse exchange traded funds.
For instance, while the iShares Barclays 20+ Year Treasury Bond ETF (NYSEArca: TLT) has declined 12.1% over the past three months on higher rates, the ProShares UltraShort 20+ Year Treasury ETF (NYSEArca: TBT) has surged 26.7%.
“You should also be confident on the timing of when interest rates will rise, and you should hold this speculative bearish conviction with a high degree of certainty in order to take on the amplified risks and returns that this double-short position provides,” according to Morningstar analyst Timothy Strauts.
Interest rates and bond prices have an inverse relationship. As interest rates rise, bond prices fall. After hitting a three decade low, interest rates are finally beginning to climb, and once the Fed eventually shifts away from its loose monetary policy, rates could rise even higher.
The benchmark 10-year Treasury bond yield is hovering around 2.6% while the yield on 30-year Treasuries is just under 3.7%.
TBT tries to reflect the daily investment performance of two times the inverse, or -200%, the Barclays U.S. 20+ Year Treasury Bond Index, which holds long-term U.S. Treasury bonds.
Traders should know that inverse and leveraged products are not suitable for long-term buy-and-hold investors as the compounding affects from the rebalances would create divergences from the ETF’s performance to that of the underlying index, especially over periods of high volatility. [Inverse & Leveraged ETFs]
Nevertheless, sophisticated investors who are comfortable with this type of investment should keep a close watch over inverse and leveraged ETFs if used in a short-term, tactical trading strategy. [Using Inverse ETFs to Hedge Interest Rate Risk]
ProShares UltraShort 20+ Year Treasury ETF
For more information on Treasuries, visit our Treasury bonds category.
Max Chen contributed to this article.