Inverse Treasury ETFs Thrive as Rates Soar | ETF Trends

As yields on benchmark 10-year Treasuries touch a two-year high, more investors are beginning to understand the potential negative effects of rising rates in their bond portfolios. Nevertheless, there are a number of inverse exchange traded funds that can hedge against misfortunes in the Treasury market.

Bolstered by speculation on Fed tightening as the U.S. economy improves, Treasury bond prices are being pressured by rising rates, with the yield on 10-year Treasuries rising up to 3.01% Friday, the highest since July 26, 2011, Bloomberg reports.

The Fed is “gradually pulling back, which means the market will pull back from its distorted levels,” Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia, said in the article. “I expect a slow drift to 3.25 percent by the end of the first quarter.”

The price on bonds have an inverse relationship to interest rates. If rates rise, bond prices decline. For instance, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has an effective duration of 7.55 and a 2.50% 30-day SEC yield, has declined 8.8% since the May 2 high as benchmark 10-year Treasury yields rose over 135 basis points. [Cash Rushes out of Treasury ETFs]

Meanwhile, the ProShares Short 7-10 Year Treasury (NYSEArca: TBX), which tries to track the inverse, or -100%, daily performance of the Barclays U.S. 7-10 Year Treasury Bond Index, rose 6.8%.