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TLT Woes Stoke Interest in Leveraged Bond ETFs

With almost $5.2 billion in assets under management and average daily volume of nearly 8.7 million shares, the iShares 20+ Year Treasury Bond ETF (TLT) is considered one of the gold standards among fixed income exchange traded funds holding longer-dated U.S. government debt.

Ten-year Treasury yields are up 12.2% over the past month, causing TLT and rival bond ETFs, including the Vanguard Long-Term Bond ETF (BLV) , considerable consternation. Since the start of February, TLT has lost 13.7%. As Chris Kimble of Kimble Charting Solutions notes, that works out to be the third-worst 16-week rate of change decline in TLT’s history. The ETF turns 13 in July.

Data suggest professional investors continue gobbling up fixed income ETFs. The study, Bond Market Challenges Continue to Drive Demand for Fixed-Income ETFs, conducted by BlackRock’s (BLK) iShares unit, the world’s largest ETF sponsor, and Greenwich Associates, notes that bond ETFs are taking on increasingly important roles in institutional portfolios. [Big Demand for Bond ETFs]

“Based on the study, growth of ETF usage is expected to be robust. One-quarter of the institutions in the study—and 40% of the investment managers—plan to increase their use of bond ETFs in the coming 12 months, while none of the respondents said both more common among institutional investors and more important within institutional portfolios.

Overall, 59% of fixed-income ETF users reported that they have increased ETF usage since 2011,” according to the study. [Institutions Increase use of ETFs]

Data also suggest investors are not waiting around to see further return decay in ETFs like TLT and the iShares 7-10 Year Treasury Bond ETF (IEF) at the hands of rising Treasury yields. Since TLT’s slide commenced in at the start of February, the ETF has bled $1.3 billion in assets while IEF has lost $959 million over that period. Investors mistakenly allocated $144 million to BLV, an ETF that has tumbled nearly 11% over that time frame.

And where there have been departures from traditional long duration Treasury, there have been inflows to inverse and leveraged funds that rise when ETFs like TLT decline. For example, the ProShares Short 20+ Year Treasury (TBF) , which aims to deliver the daily inverse performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index, has added $86.5 million since the start of February.

The ProShares UltraShort 20+ Year Treasury (TBT) . TBT, which seeks to deliver twice the daily inverse performance of the Barclays Capital US Treasury 20+ Year Treasury Bond Index, has seen nearly $70 million of inflows over that period. [Bearish Bond ETFs Back in Style]

Indicating that investors are comfortable ratcheting up risk in their bearish Treasury bets, the Direxion Daily 20-Year Treasury Bear 3X (TMV) has seen a steady of influx of new cash. Nearly $150 million since the start of February, to be precise.

TMV attempts to deliver triple the daily inverse returns of the NYSE Current 20-Year U.S. Treasury Index. On May 13, nearly 1.1 million new shares of TMV were created. TMV’s shares outstanding count rose by one million for three weeks ended May 12. [This Bond ETF is Killing It]

Over the past week, volume in TMV has been 17% above the trailing 20-day average while the ETF has added new assets over the past month, according to Direxion data. TMV is the top-performing Direxion leveraged bearish ETF this month, having entered Thursday with a month-to-date gain of almost 17%.

iShares 20+ Year Treasury Bond ETF


Chart Courtesy: Kimble Charting Solutions

Tom Lydon’s clients own shares of TLT.