After years of piling into the fixed-income market, investors are now faced with significant risks of a rising rate environment. Consequently, bond traders can utilize short or inverse exchange traded funds to hedge their exposure.
“Today, six and a half years after the collapse of Lehman, there is a Bigger Short cooking. That Bigger Short is long-term claims on paper money, i.e., bonds,” Billionaire investor Paul Singer said in a note, CNBC reports.
Singer argues that the markets are growing complacent with central bank quantitative easing and loose monetary policies, which could be setting up the fixed-income market for a severe correction.
“Asset prices are skyrocketing because of massive public-sector purchases. The tinkering and experimentation that characterizes each round of novel central bank policy leads to more and more complicated unwanted consequences and convolutions,” Singer added. “Central bankers are, in our view, getting ‘pretzeled’ by all this flailing, yet they deliver it with aplomb and serene self-confidence. Are they really taming volatility with their bond-buying, or just jamming it into a coiled spring?”
Consequently, bond investors who are wary about a possible turn in the fixed-income market can utilize ETFs that tack a bearish position on the markets. For instance, the ProShares Short 20+ Year Treasury (NYSEArca: TBF) aims to deliver the daily inverse performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index.
More aggressive traders can try to juice returns through leveraged options. The ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) seeks to deliver twice the daily inverse performance of the Barclays Capital US Treasury 20+ Year Treasury Bond Index. The Direxion Daily 20-Year Treasury Bear 3X (NYSEArca: TMV) attempts to deliver triple the daily inverse returns of the NYSE Current 20-Year U.S. Treasury Index. [TLT Woes Stoke Interest in Leveraged Bond ETFs]