Exchange traded funds that invest in Treasury bonds have been strong over the past month as yields decline, but many investors remain worried about the U.S. debt ceiling and higher interest rates.
Eric Jacobson, Morningstar’s director of fixed-income research, mentions the key themes to examine in the bond market as the threat of rising interest rates looms. [Risk And Your ETF Portfolio: How to Protect It.]
ETFs designed to profit when Treasury bonds decline in value include:
- ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT): Gives interest income earned on cash and financial instruments that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Index.
- Direxion Daily 30 Year Treasury Bear 3x Shares (NYSEArca: TMV): Provides 300% of the inverse of the price performance of the NYSE 20 Year Plus Treasury Bond Index.
These ETFs provide inverse leverage on a daily basis. Yet betting against Treasuries with these inverse ETFs has been a losing strategy in 2011 as bond prices have risen and yields pulled back. [Treasury ETFs Rise Despite Investor Doubts.]
Jacobson noted the difficulties of trying to time the market.
“We really don’t know when short-term rates are going to go up,” he said, according to a transcript. “We’ve gone back and forth over the last couple years in terms of the signals that we’ve been getting from the marketplace, because economic growth has gone up and down, and we also don’t know quite what’s going to happen after the effect of ‘quantitative easing’ rolls off and so forth.”
Jacobson thinks the most important thing to avoid is hanging out in cash on the sidelines.
“I get a lot of pushback on this, but I think it’s kind of a dangerous idea, if for no other reason than there really isn’t anything to make in cash right now … because short-term rates being held very low by the Fed are so low that if you sit around in cash and we have any inflation whatsoever, your so-called real return, in other words that’s your return after the effect of inflation, are going to be negative, and you’re going to lose purchasing power,” he said.
Tisha Guerrero 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.