A steepening yield curve, which is the sign of a widening gap between short- and longer-dated Treasurys, may sound like an ominous proposition, but astute investors know there are ways to profit from yield curve fluctuations.
Should the yield curve continue to steepen, investors can profit from that trend with the iPath US Treasury Steepener ETN (NYSEArca: STPP), an ETN “designed to provide investors with exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index,” according to the ETN’s issuer.
“To accomplish this objective, the performance of the Index tracks the returns of a notional investment in a weighted “long” position in relation to 2-year Treasury futures contracts and a weighted “short” position in relation to 10-year Treasury futures contracts, as traded on the Chicago Board of Trade,” according to STPP’s web site.
On Friday, the yield spread between 10-years and two-years was 224 basis points, up from 180 basis points on June 5, according to data from the U.S. Treasury Department.
Indicating that is indeed effective at its job, STPP has surged 11% since June 5. A curve steepener trade utilizes derivatives, or futures, to capitalize on a widening yield difference that occurs due to an increasing yield curve between two Treasury bonds with varying maturities. [How to Profit From The Steepening Yield Curve]
Federal Reserve Chairman Ben Bernanke emphasized that rate tightening is still a long way off, but he did not say the same about quantitative easing tapering in remarks made Wednesday. In fact, many market participants still believe QE tapering is on the table and could begin as soon as September, indicating that the dark clouds hanging over the Treasury market could be with investors for a while. [Yield Spike Plagues Treasury ETF]