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Two Ways Treasury Bond ETFs Will React If U.S. Defaults


The government shutdown has the markets scrambling, and a looming U.S. default on debt has left many Treasury bond exchange traded fund investors scratching their heads.

According to a recent J.P. Morgan survey, investors are still divided on how long-term U.S. Treasuries will react to a U.S. technical default, Sober Look points out.

Some bond investors believe that long-term rates could fall with people turning to safe-haven Treasuries as the economy and equity markets take a beating in a deflationary period. Consequently, long-term U.S. debt will see nominal yields decline even as real yields remain positive.

Long-term Treasury bond ETFs like the iShares 20+ Year Treasury Bond ETF (TLT) could benefit from falling interest rates.

On the other hand, a U.S. default could shake confidence in U.S. debt, pushing away investors, notably foreigners. Consequently, the U.S. dollar will depreciate and long-term rates will surge.

As rates spike, investors can capitalize on the trend through ETFs with inverse Treasury bond exposure, such as the ProShares UltraShort 20+ Year Treasury ETF (TBT) and the Daily 20+ Year Treasury Bear 3X Shares (TMV) . [iShares: What to do when a Rising Rate Environment is NEAR]

For more information on Treasuries, visit our Treasury bonds 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.