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Bond Index ETFs for Rising Interest Rates

Treasury yields have ticked higher from the summer low as central bank stimulus has improved sentiment and nudged investors into riskier assets. Bond ETF investors can protect themselves from rising interest rates by moving into funds with shorter durations, while ETFs that short Treasuries are a more aggressive play.

Yields on the 10-year Treasury nearly touched 1.9% earlier this week after bottoming around 1.4% in July. Bond prices and yields move in opposite directions.

“We had seen a huge rally in risk markets up to the end of last week. We seem to have taken a bit of a pause for breath now as the market assesses the impact of ECB and Fed measures,” RIA Capital Markets bond strategist Nick Stamenkovic said in a Reuters article.

Nevertheless, Stamenkovic projects yields will hit 2% at the end of the year. [Treasury ETFs: Flight from Safety]

Investors worried about the impact of rising rates can consider bond ETFs with shorter durations.

“A first step is to assess the impact a rise in rates may have on your bond portfolio. ‘Duration’ is a term used to measure a bond’s sensitivity to changes in interest rates,” writes Kathy Jones, fixed-income strategist at the Schwab Center for Financial Research. “The concept is similar to maturity, in that longer-term bonds usually have longer durations and tend to be more volatile than shorter-maturity bonds. In general, the longer the duration of a bond, the more its market value is going to fluctuate with the interest-rate cycle.”

Here are some bond ETFs with shorter durations:

  • iShares Barclays 1-3 Year Treasury Bond Fund (SHY) : effective duration of 1.87 years.

  • PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ) : effective duration of 1.87 years.

  • Schwab Short-Term U.S. Treasury ETF (SCHO) : effective duration of 1.92 years.

  • Vanguard Short-Term Government Bond ETF (VGSH) : effective duration of 1.9 years.

On the other hand, if you want to aggressively hedge against falling Treasury prices, you can take a look at inverse Treasury ETF options:

  • ProShares Short 20+ Year Treasury (TBF)

  • ProShares Short 7-10 Year Treasury (TBX)

  • UltraShort Barclays 20+ Year Treasury (TBT)

  • UltraShort Barclays 7-10 Year Treasury (PST)

  • Direxion Daily 20-year Treasury Bear 3x (TMV)

  • Direxion 7-10 year Treasury Bear 3x (TYO)

For more information on U.S Treasuries, visit our Treasury bonds category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own SHY.

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.