With all the talk about Federal Reserve tapering, which could arrive later this year, yields on longer dated U.S. Treasurys are soaring. Yields on 10- and 30-year Treasurys were 2.13% and 3.27%, respectively, on June 3 before climbing to 2.52% and 3.56% on Friday, according to Treasury Department data.
Yields on five-years are up 39 basis points while 20-years have seen yields climb 34 basis points, the data indicate. That has investors looking for taper tonic and the ProShares UltraPro Short 20+ Year Treasury (TTT) offers just that.
TTT, which debuted in April 2012, tries to reflect three times the inverse, or -300%, daily performance of the Barclays Capital U.S. 20+ Year Treasury Index. It achieves it daily exposure through derivatives and swaps. ProShares, the largest issuer of leveraged ETFs, is no stranger to success with inverse bond ETFs as the firm’s ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) had $3.43 billion in assets under management at the end of the first quarter. [ProShares Adds Leveraged Treasury ETFs]
TBT is by far the more heavily traded product with average daily volume of nearly 9.5 million shares compared to less than 50,000 for TTT. However, a some extra leverage is meaningful to near-term returns. TBT is up 14.6% in the past month and that sounds nice until measured against the 22.2% TTT has returned since May 23.
Rising rates have prompted aggressive traders to use inverse ETFs to capitalize on weakening Treasuries and fixed-income assets, but products such as TBT and TTT are far from risk-free. Over longer holding periods, leveraged ETFs frequently deliver returns that are far different than double or triple the indexes the funds are designed to track. Investors may also have to rebalance their allocations on a frequent basis to mitigate the negative effects of daily compounding. [Inverse ETFs to Hedge Interest Rate Risk]
Still, these are go-go days for inverse bond ETFs and it is hard for some traders to resist the allure of TTT’s potential. Although, the fund is designed to give inverse exposure to Treasurys with maturities of 20 years and longer, it is worth noting TTT has jumped 17.4% since June 3 as 10-year yields have risen 39 basis points. Some market participants see yields on 10-years rising to 3%.
Hypothetically and assuming no significant appreciation in bond prices, TTT could tack on another 20% if 10-year yields climb to 3%. Remembering that leverage cuts both ways is critical. Investors should consider that there have been times when the short Treasury trade has become too crowded, leading to swift jumps in bond prices that sent the bears scurrying for cover, a scenario that could lead to significant losses in any short Treasury ETF. [Short Treasury ETFs Mauled by Bond Rally]
ProShares UltraPro Short 20+ Year Treasury
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.