Bond markets rallied as rates plunged, with yields on 30-year Treasury notes dipping to record lows this week. Contrarian investors who believe the gains were overdone may consider some alternative bond-related exchange traded fund strategies.
Yields on benchmark 10-year Treasury notes fell below two-year yields for the first time since 2007, or what is better known as a yield curve inversion that many said would foreshadow an economic recession.
While bond prices have gained in recent weeks on heightened market volatility and safe-haven demand, some traders and fund managers don’t believe it will continue but rather insist the global economy remains healthy, the Wall Street Journal reports. These more optimistic argue that the bond market is overly pessimistic and are betting against debt securities that are overbought.
“You’re either going to make very poor returns from government bonds going forward or you’re going to make extremely poor returns,” Tristan Hanson, a fund manager at M&G Investments, told the WSJ, recommending investors buy equities and avoid bonds issued by Group of Seven governments.
Further Drops in Yield?
Investors are paring back bets on further drops in yields in the U.S. as many fear that the risks weighing on the global economy, like trade tensions or uncertainty over Brexit, could quickly unwind and push yields higher or bond prices lower.
For example, while Xavier Baraton, global chief investment officer for fixed income at HSBC Global Asset Management, has been buying Treasuries that mature in two to 10 years, he is also betting against comparable bonds that mature in 15 to 30 years as a form of “insurance” if the dismal economic outlook is overdone.
“The global economy—while not in perfect health—is stable and a global recession looks unlikely anytime soon,” Baraton told the WSJ.
Fixed-income investors who also believe the buying has been overdone could 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.