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Inverse Treasury ETFs Help Hedge Against Rising Rates


Speculation on Fed tapering has pushed benchmark Treasury yields to a 11-week high. Consequently, bond investors have begun shifting out of long-term debt as rates rise, but the more aggressive trader can capitalize on tumbling Treasuries with inverse exchange traded funds.

Bond prices are declining as yields on 10-year Treasury notes rose to as high as 2.87% Thursday, the highest since Sept. 18, Bloomberg reports.

“The market is trying to discern the start time of when the Fed will begin to reduce purchases, and the data points over the last week or so make it swing slightly in favor of the door still being open for a December taper,” Sean Murphy, a trader in New York at Societe Generale SA, said in the article. “That being the case, the Treasury market is trading heavy.”

The price on bonds have an inverse relationship to interest rates. If rates rise, bond prices decline. For instance, the iShares 20+ Year Treasury Bond ETF (TLT) has declined 12.9% year-to-date as benchmark Treasury yields gained over 120 basis points since the May low. [Big Bond ETF Faces Critical Test]

On the other hand, the ProShares Short 20+ Year Treasury (TBF) and Direxion Daily 20+ Year Treasury Bear 1x Shares (TYBS) , which both try to produce the inverse, or -100%, return of long-term Treasuries, have been outperforming. TBF is up 11.7% year-to-date while TYBS gained 13.4%.

For those looking for a supercharged bet against Treasury prices, the ProShares UltraShort 20+ Year Treasury (TBT) provides a -200% return of long-term Treasuries. TBT is up 24.1% year-to-date. The ProShares UltraPro Short 20+ Year Treasury (TTT) and Direxion Daily 20-Year Treasury Bear 3X (NYSEArca: TMV) reflect -300% return of Treasuries. TTT is up 35.4% year-to-date, and TMV gained 33.1% so far this year.

Potential traders should be aware that the inverse and leveraged products try to achieve their objective on a daily basis, and due to compounding of daily returns, the performance of the ETFs may diverge from the target return over extended periods, especially during volatile market conditions.

Inverse and leveraged ETFs can be used as a portfolio hedge against market turns. However, investors who are more comfortable with the strategy have utilized the ETFs as speculative plays.

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