During the financial crisis, we sought the warmth and safety of Treasury bonds. But now that Treasury prices are starting to fall, is it time to short Treasuries and related exchange traded funds (ETFs)?
Some investors seemed to think so last week. Leveraged ETFs that short U.S. Treasury bonds saw inflows after yields popped up, says John Spence for The Wall Street Journal.
The returns for U.S. Treasuries are starting to normalize and even start to increase, writes Chris Fernandez for Seeking Alpha. Warren Buffet recently stated that the bubble forming in the U.S. Treasuries may even rival that of the housing bubble before the collapse.
As the U.S. government increases spending, the government will have to borrow by issuing Treasuries with maturities ranging from 1 to 30 years. Treasuries are now declining about 20% from previous highs, and yields are over 4%. If buyers of Treasuries don’t want any more debt then the government will have to entice them with higher yields, or lowering Treasury prices.
The current yields have yet to reach historic lows and the government is probably not finished with getting as much money out of outside sources as it can. But yields will probably have to be increased if inflation sets in and repayments could be payed out in depreciated dollars.
There are also talks of the U.S.’s AAA credit rating being downgraded. If this were to happen then investors would demand higher yields for the riskier debt, which would push Treasury prices down.
When the U.S. government eventually raises interest rates, Treasury prices will fall and yields will rise. More recently, the U.S. has auctioned Treasuries and demand was low. Treasury prices may continue to fall as the government tries to sell more Treasuries that borrowers won’t be too enthusiastically investing in.
How can someone capitalize on decreasing Treasury prices? There are some short Treasury ETFs available but be sure that you understand the risks involved in investing in leveraged funds before you part take in them.
- Ultrashort Lehman 20+Year Treasury Proshares (TBT): up 51.4% year-to-date
- Direxion Daily 30 Year Treasury Bear 3X Shares (TMV): up 43.6% in the last month
Max Chen contributed to this article.