Inverse Treasury ETFs Thrive as Rates Soar

December 27th at 2:02pm by Max Chen

As yields on benchmark 10-year Treasuries touch a two-year high, more investors are beginning to understand the potential negative effects of rising rates in their bond portfolios. Nevertheless, there are a number of inverse exchange traded funds that can hedge against misfortunes in the Treasury market.

Bolstered by speculation on Fed tightening as the U.S. economy improves, Treasury bond prices are being pressured by rising rates, with the yield on 10-year Treasuries rising up to 3.01% Friday, the highest since July 26, 2011, Bloomberg reports.

The Fed is “gradually pulling back, which means the market will pull back from its distorted levels,” Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia, said in the article. “I expect a slow drift to 3.25 percent by the end of the first quarter.”

The price on bonds have an inverse relationship to interest rates. If rates rise, bond prices decline. For instance, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has an effective duration of 7.55 and a 2.50% 30-day SEC yield, has declined 8.8% since the May 2 high as benchmark 10-year Treasury yields rose over 135 basis points. [Cash Rushes out of Treasury ETFs]

Meanwhile, the ProShares Short 7-10 Year Treasury (NYSEArca: TBX), which tries to track the inverse, or -100%, daily performance of the Barclays U.S. 7-10 Year Treasury Bond Index, rose 6.8%.

For those looking for a supercharged bet against Treasury prices but are willing to taking on the added risk, ProShares UltraShort 7-10 Year Treasury (NYSEArca: PST), which tries to track two times the inverse, or -200%, daily performance of the Barclays U.S. 7-10 Year Treasury Bond Index, is up 14.8%, and the Direxion 7-10 year Treasury Bear 3x (NYSEArca: TYO), which takes a triple inverse, or -300%, approach is gained 21.1% since May 2.

Potential traders, though, should be aware that the inverse and leveraged products try to achieve their objective on a daily basis, and due to compounding of daily returns, the performance of the ETFs may diverge from the target return over extended periods, especially during volatile market conditions. [Inverse Treasury ETFs Help Hedge Against Rising Rates]

Due to months of intense speculation regarding the arrival of tapering, investors pulled $22 billion from long-duration bond ETFs in the first 11 months of the year while plowing $22 billion into short-duration funds.

For more information on Treasuries, visit our Treasury bonds category.