Ten-year Treasury yields surged 9.8% last week to 2.11%, the highest levels since late February. Over the past month, 10-year yields are up 11.2%.
Those rising yields and sagging bond prices are stoking returns by and inflows to exchange traded funds that rise when government bond prices slide. ETFs such as the ProShares Short 20+ Year Treasury (NYSEArca: TBF), which aims to deliver the daily inverse performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index, surged last week.
TBF is not leveraged, so if the Barclays Capital 20+ Year U.S. Treasury Bond Index falls 1% on a particular, the expectation is that TBF will rise by the same amount. TBF, home to almost $901 million in assets at the end of the first quarter, jumped 3.6% last week while adding $8.7 million in new assets. [These Leveraged ETFs are Burning Investors]
TBF “has riskier cousins, whose share prices move two or three times opposite of the daily change of the Barclays index. These funds posted more eye-catching returns (last) week,” reports Richard Leong for Reuters.
A prime example is the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT). TBT, which seeks to deliver twice the daily inverse performance of the Barclays Capital US Treasury 20+ Year Treasury Bond Index, climbed 7.2% last week while adding $39.5 million in new assets. [Chart Problems for a Big Bond ETF]
TBT’s triple-leveraged equivalent, the ProShares UltraPro Short 20+ Year Treasury (NYSEArca: TTT), added 11.6% last week.
Although the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) has traded only modestly lower this year, leveraged bearish plays on that giant bond fund have attracted inflows. In a sign that some investors are willing to incur significant risk on the way to potentially large profits, the unleveraged TBF has $120 million in assets this year while TBT and TTT have hauled in $60.8 million and $9.3 million, respectively.
The Direxion Daily 20-Year Treasury Bear 3X (NYSEArca: TMV), rival to TTT, added more than 11% last week and has surged 15.3% over the past month. Year-to-date, investors have added $62 million in new assets to TMV.
Looking ahead, the Federal Reserve interest rate hike has been a major point of concern for market players. In anticipation of higher rates ahead, investors can utilize inverse ETFs to hedge their fixed-income portfolio’s duration risk – the measure of a bond fund’s sensitivity to changes in interest rates, so a fund with a longer duration has a greater risk of price depreciation in response to rising rates. [Inverse ETFs for Market Turns]
Long-term bonds are most at risk of a rate hike. For instance, TLT shows a 17.7 year duration – duration is a bond fund’s measure of interest rate sensitivity. Consequently, a 1% rise in rates could translate to about a 17.7% decline in TLT’s price. In contrast, bond funds with shorter durations would have a lower sensitivity to rate changes.
ProShares UltraShort 20+ Year Treasury
Tom Lydon’s clients own shares of TLT.