Exchange traded funds tracking long-term Treasuries are testing a key support level that if broken could lead to a move higher in yields. Inverse Treasury ETFs are one tool that institutional investors are using to hedge against a potential spike in long-term rates.
There are several ETFs that short Treasuries – they rise when bond prices fall. They include ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT), ProShares UltraShort 7-10 Year Treasury (NYSEArca: PST), ProShares Short 20+ Year Treasury (NYSEArca: TBF) and Direxion Daily 30-Year Treasury Bear 3X (TMV). [Treasury ETFs on the Precipice]
Recently, a persistent theme in options markets has been bullish calling buying in TBT as options players are likely looking for higher yields – and a fall in bond prices – in longer dated Treasuries, says Paul Weisbruch, head of ETF/options sales and trading at Street One Financial. [Chart of the Day: Short ETFs for Treasuries]
There has also been put buying activity in iShares Barclays 20+ Year Treasury (NYSEArca: TLT), “which likely has the same motivation as the TBT call buyers,” he added. [ETFs That Short U.S. Treasury Bonds]
Still, Treasury bonds have been a great investment the past few years with the financial crisis, violent swings in the stock market and the Federal Reserve’s bond buying program. Yields are moving higher this week although the 10-year note had been stuck below 2% in early March.
“Bonds have achieved a near 50% total return since year-end 2009. With those outsized returns, shorting bonds has been a toxic strategy,” writes Doug Kass at The Street.
In fact, the great bull market in bonds has persisted during most of the last four decades, Kass said.
“Over the last half century, bonds have historically been considered a risk-free asset class,” he wrote. “Nevertheless, I believe bonds should now be seen as a return-free asset class that is very risky, and long-dated fixed income should require a warning label for all potential buyers.”
Kass cited five reasons to short Treasuries:
- The flight to safety will likely have a diminishing half-life.
- Flows out of stock funds and into bond funds seem to be at a tipping point.
- Confidence is recovering as economic growth reemerges and risk markets improve.
- Inflation remains an issue.
- The failure to address our fiscal imbalances could come back and bite the bond market.
PIMCO Total Return ETF (NYSEArca: TRXT) manager Bill Gross also tweeted a warning on Treasuries. He said if investors want to own long Treasuries, buy them in TIPS form – Treasury Inflation Protected Securities. Gross on Tuesday said 2-3% inflation is “a minimum in future years.”
iShares Barclays 20+ Year Treasury
