As investors grow more optimistic about the economic recovery, safe-haven assets like Treasury bond ETFs may be losing their appeal.
According to IHS Markit Ltd data, short interest in the iShares 20+ Year Treasury Bond ETF (NasdaqGS: TLT) has increased to 25% of shares outstanding, the highest level of short interest since early 2017, Bloomberg reports.
Furthermore, investors are dumping exposure to long-term Treasuries. The iShares 20+ Year Treasury Bond ETF has posted outflows every day so far this week, which puts the fund on pace for weekly withdrawals of over $1 billion, its worst weekly outflow since November, according to Bloomberg data.
Meanwhile, investors have shifted over toward the short end of the yield curve. The Vanguard Short-Term Government Bond ETF (NASDAQ: VGSH) saw $1.5 billion in net inflows over the past week, according to ETFdb data. VGSH tracks short-term Treasuries, which provides a portfolio carrying relatively little interest rate and credit risk.
Treasury yields began to tick higher this week as inflation expectations touched multi-year highs. Bond prices and yields have an inverse relationship. Further adding to the inflation outlook, the Federal Reserve Chairman Jerome Powell noted that the central bank views any jump in price pressures as short-term and will not be cutting back on its crisis-level monetary support any time soon. Richard Bernstein Advisors LLC warned that has given the green light for long-dated Treasuries to sell off.
“What they’re saying is, we want inflation and growth to run sizzling hot. We aren’t worried about inflation because we can deal with that if we have to,” Michael Contopoulos, the firm’s director of fixed income and portfolio manager, told Bloomberg. “So it’s a free pass to inflationary pressures and pressure on the long end.”
Fixed income investors who also believe Treasuries could continue to fall can incorporate a small inverse bond ETF play to a well-diversified fixed income portfolio. For example, bond investors could take on a position to hedge against a decline in bond prices or rise in yields through simple inverse or short Treasury bond ETFs, such as the Direxion Daily 7-10 Year Treasury Bear 1x Shares (NYSEArca: TYNS), Direxion Daily 20+ Year Treasury Bear 1x Shares (NYSEArca: TYBS), or ProShares Short 20+ Year Treasury (NYSEArca: TBF).
Similarly, the Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEArca: TMV), which tracks the 300% short daily performance of the NYSE 20 Year Plus Treasury Bond Index, has been popular pick for more aggressive exposure to the turns in the Treasury market. Additionally, the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) tries to reflect the -2x or -200% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index and the ProShares UltraPro Short 20+ Year Treasury (NYSEArca: TTT) takes the -3x or -300% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.
For more information on the fixed-income markets, visit our bond ETFs category.