The government shutdown has the markets scrambling, and a looming U.S. default on debt has left many Treasury bond exchange traded fund investors scratching their heads.
According to a recent J.P. Morgan survey, investors are still divided on how long-term U.S. Treasuries will react to a U.S. technical default, Sober Look points out.
Some bond investors believe that long-term rates could fall with people turning to safe-haven Treasuries as the economy and equity markets take a beating in a deflationary period. Consequently, long-term U.S. debt will see nominal yields decline even as real yields remain positive.
Long-term Treasury bond ETFs like the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) could benefit from falling interest rates.
On the other hand, a U.S. default could shake confidence in U.S. debt, pushing away investors, notably foreigners. Consequently, the U.S. dollar will depreciate and long-term rates will surge.
As rates spike, investors can capitalize on the trend through ETFs with inverse Treasury bond exposure, such as the ProShares UltraShort 20+ Year Treasury ETF (NYSEArca: TBT) and the Daily 20+ Year Treasury Bear 3X Shares (NYSEArca: TMV). [iShares: What to do when a Rising Rate Environment is NEAR]
For more information on Treasuries, visit our Treasury bonds category.
Max Chen contributed to this article.