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Inverse Bond ETFs to Hedge Growing Risk in Fixed-Income Market


After years of piling into the fixed-income market, investors are now faced with significant risks of a rising rate environment. Consequently, bond traders can utilize short or inverse exchange traded funds to hedge their exposure.

“Today, six and a half years after the collapse of Lehman, there is a Bigger Short cooking. That Bigger Short is long-term claims on paper money, i.e., bonds,” Billionaire investor Paul Singer said in a note, CNBC reports.

Singer argues that the markets are growing complacent with central bank quantitative easing and loose monetary policies, which could be setting up the fixed-income market for a severe correction.

“Asset prices are skyrocketing because of massive public-sector purchases. The tinkering and experimentation that characterizes each round of novel central bank policy leads to more and more complicated unwanted consequences and convolutions,” Singer added. “Central bankers are, in our view, getting ‘pretzeled’ by all this flailing, yet they deliver it with aplomb and serene self-confidence. Are they really taming volatility with their bond-buying, or just jamming it into a coiled spring?”

Consequently, bond investors who are wary about a possible turn in the fixed-income market can utilize ETFs that tack a bearish position on the markets. For instance, the ProShares Short 20+ Year Treasury (TBF) aims to deliver the daily inverse performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index.

More aggressive traders can try to juice returns through leveraged options. The ProShares UltraShort 20+ Year Treasury (TBT) seeks to deliver twice the daily inverse performance of the Barclays Capital US Treasury 20+ Year Treasury Bond Index. The Direxion Daily 20-Year Treasury Bear 3X (TMV) attempts to deliver triple the daily inverse returns of the NYSE Current 20-Year U.S. Treasury Index. [TLT Woes Stoke Interest in Leveraged Bond ETFs]

Alternatively, fixed-income investors can also hedge their corporate debt exposure with inverse high-yield and investment-grade corporate debt ETFs. For instance, the ProShares Short High Yield ETF (SJB) takes the inverse -1x or -100% daily performance of the Markit iBoxx $ Liquid High Yield Index, and the ProShares Short Investment Grade Corporate ETF (IGS) tracks the -1x or -100% daily performance of the Markit iBoxx $ Liquid Investment Grade Index. [Inverse ETFs to Hedge Against Hurdles Ahead]

The two inverse corporate bond ETF plays may be less volatile than the inverse long-term Treasury ETF options as SJB only has a duration of 3.63 years and IGS shows a 8.05 year duration. In contrast, TBF has a 18.68 year duration, TBT has a 18.68 year duration and TMV has a 17.64 year duration. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a longer duration corresponds with greater sensitivity and risks.

“Today, the Bigger Short is in a much larger marketplace,” Singer wrote, comparing bonds to subprime mortgages, “so it can be undertaken in whatever size one can stomach, and the cost of effectuating it during the waiting period is really low.”

For more information on the fixed-income market, visit our bond ETFs category.

Max Chen contributed to this article.

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.