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‘Dead Cat Bounce’ for Treasury Bond ETFs?


The iShares Barclays 20+ Year Treasury Bond (TLT) opened up on a gap down today, trading with a $115 handle once again, and the prevailing theme in options markets has been bearish sentiment being conveyed in terms of bond prices.

TLT puts continue to be accumulated in the marketplace and TBT (ProShares UltraShort 20+ Year Treasury) calls were purchased yesterday by institutional participants adding to existing positions.

TLT has not traded lower than $115.51 (intraday low nine trading sessions ago) since early last spring, so at current levels ($1115.82) and given the eagerness of shorts to enter the picture here and create even more static, the longer term Treasury bond market via TLT is one of the first things on our immediate radar right now. [Tresury ETFs Weak as 10-Year Yield Above 2% Before Auction]

Interestingly, neither fund has seen considerable real flows in either direction in the past week or so.

We have covered the degradation of longer term U.S. Treasury bond prices and related ETF/options flows that have appeared in the marketplace over the past few months as TLT — expense ratio 0.15% — has stalled from its November of 2012 high down to current levels ($115.82), inside of three months, a nearly 9% fall.

On Jan. 2 we pointed out the increased appetite for short exposure to longer dated U.S. Treasuries in this piece, and given the continued weakness in Treasury prices (and rise in yields) we have an opportunity to play contrarian today.

Having already highlighted ETPs including TBT (ProShares UltraShort 20+ Year Treasury, Expense Ratio, 0.95%), TMV (Direxion Daily 20 Year Plus Treasury Bear 3X, Expense Ratio 0.95%), and SBND (PowerShares DB 3X Short 25+ Year Treasury Bond ETN, Expense Ratio 0.95%) recently, we have to think there are at least a “small camp” of institutional investors that may see appeal at current levels in U.S. Treasuries and may attempt to play a potential “dead cat bounce” if there is one.

TLT remains the largest player in the “long” space here, with more than $3 billion in current assets under management, while other alternatives in the ETP landscape that offer exposure to longer dated U.S. Treasury bonds include VGLT (Vanguard Long Term Government Bond, Expense Ratio 0.14%), and TLO (SPDR Barclays Long Term Treasury, Expense Ratio 0.13%) for instance.

ETPs that incorporate leverage (daily, and in the case of LBND monthly) from the “bull” side of bond prices that are designed for short term speculative trading and/or aggressive hedging include TMF (Direxion Daily 20 Year Plus Treasury Bull 3X, Expense Ratio 0.95%), LBND (PowerShares DB 3X Long 25+ Year Treasury Bond, Expense Ratio 0.95%), UBT (ProShares Ultra 20+ Year Treasury, Expense Ratio 0.95%), and DLBL (iPath U.S. Treasury Long Bond Bull ETN, Expense Ratio 0.75%).

We would not be surprised if some of these ticker symbols are not readily recognizable to most ETF portfolio managers, especially given the prevailing sentiment to “want to be short U.S. Treasuries” in looking for lower bond prices and thus higher yields, and the fact that this “trade” has been popular for more than two years now among many.

It is readily apparent that the “inverse” bond ETPs have benefited from these conditions, as TBT has over $3.3 billion in AUM currently, while TMV has approximately $324 million in AUM. On the flipside, the levered “long” funds in this category have considerably less average daily trading volume and even lower asset bases (i.e. TMV has $32 million, LBND $29 million, TMF $32 million, and DLBL $3.8 million).

As with many “thematic” based ETPs, sometimes the investment theme is not necessarily acclimated to current market conditions and thus the existence of the products themselves sometimes evades the screens of the portfolio manager, which appears to be the case here to some extent.

iShares Barclays 20+ Year Treasury Bond


For more information on Street One ETF research and ETF trade execution/liquidity services, contact Paul Weisbruch at pweisbruch@streetonefinancial.com.