Rates have been rising fast in the United States over the past few days on growing risk appetite and reflationary optimism. First, vaccine distribution has given a material boost to the U.S. treasury yields.
And then hopes that President Joe Biden will be able to inject more fiscal stimulus (thanks to the Democratic control over Senate) have been pushing long-term rates even higher. Meanwhile, the Fed has remained dovish as the job market is yet to heal.
The 10-year U.S. Treasury yield rose above 1.3% for the first time in nearly a year on Feb 16. The benchmark yield, reached 1.309%, its highest level since Feb 27, 2020, when the coronavirus pandemic just started impacting the investing world.
In fact, the 10-year Treasury yield marked the biggest daily jump (up by 10 bps) in more than three months. The 30-year U.S. yield also rose, touching a one-year high of 2.095% on Feb 16.
President Joe Biden plans to take his case for a $1.9-trillion stimulus plan directly to the U.S. public on his first official trip outside of Washington. The move is probably to persuade Congress in sealing the stimulus deal on his terms.
Notably, Republicans on Capitol Hill are not in full support of Democrats’ proposed relief package, which includes “$1,400 cheques for individuals, extra funding for unemployment benefits, an increase in child tax credits and aid to state and local governments.”
Meanwhile, the New York Federal Reserve’s Empire State manufacturing report offered an upbeat economic picture, with a rise in its “prices paid index” giving cues of faster inflation. Rising energy prices are also adding to inflation. Oil prices have staged a rally lately thanks to a freezing weather (read: Will the Energy ETFs See a Sustained Rally?).
Hence, we expect a rally in U.S. treasury yields in the near term, which is a negative for bond prices. Against such a backdrop, investors can put their money in ETFs that bet against U.S. Treasury bonds. For them, we have highlighted a few inverse or leveraged inverse ETFs that could be worth buying for huge gains in a short span.
How to Play?
Inverse ETFs provide opposite exposure that is a multiple (-1x, -2x or -3x) of the performance of the underlying index using various investment strategies, such as, swaps, futures contracts and other derivative instruments.
ProShares Short 20+ Year Treasury ETF (TBF)
This product provides inverse exposure to the ICE (NYSE:ICE) U.S. Treasury 20+ Year Bond Index. The fund charges 94 bps in annual fees.
ProShares UltraShort 20+ Year Treasury (NYSE:TBT) ETF (TBT)
This ETF seeks two times (2x or 200%) the inverse daily performance of the ICE U.S. Treasury 20+ Year Bond Index. It is the most popular and liquid ETF in the inverse Treasury space with AUM of $750 million. The fund charges 92 bps in annual fees.
ProShares UltraPro Short 20+ Year Treasury ETF (TTT)
Investors having a more bearish view and a higher risk appetite could find TTT an interesting pick. This fund also tracks the same index but offers three times (3x or 300%) inverse exposure. It has AUM of $45.6 million. Expense ratio comes in at 0.95%.
Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV)
This ETF offers three times inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $165.5 million, the fund charges 104 bps in fees.
Bottom Line
As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may force these products to deviate significantly from the expected long-term performance figures (see: all the Inverse Bond ETFs here).
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