Treasuries in Longest Slump Since 1984: Inverse ETFs Soaring

The U.S. Treasury market is on track for a 12-week streak of losses, marking the longest continued slump in 38 years, as the Fed committed to keep raising rates until inflation comes under control. The Fed move will continue to push the yields higher, thereby piling up heavy losses for the Treasury bonds.

While most of the inverse ETFs in the space are riding higher, ProShares UltraPro Short 20+ Year Treasury ETF TTT and Direxion Daily 20+ Year Treasury Bear 3x Shares TMV are the show stealers with at least 192% returns so far this year. This is followed by gains of 111.2% for ProShares UltraShort 20+ Year Treasury ETF TBT, 71.5% for Direxion Daily 7-10 Year Treasury Bear 3X Shares TYO and 47.8% for ProShares Short 20+ Year Treasury ETF TBF.

Inverse ETFs provide opposite exposure, which 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. These ETFs could be worth buying for huge gains in a short span arising from rising yields.

The 10-year yields surged to 4.29%, the highest level since mid-2008, while 30-year yields jumped to 4.15%, its strongest level since July 2011. The series of rapid interest rate hikes are pushing the yields higher and will continue to do so. The lastest data showed that Fed funds futures have priced in a 91% chance of a 75 bps rate hike in November, and a roughly 75% probability of another 75 bps increase in December (read: Bet on Bank ETFs on Fed Rate Hike).

Additionally, the drop in September housing starts and new residential construction added to the chaos, signaling that the economy is slowing. U.S. housing starts dropped 8.1% to a seasonally-adjusted annual rate of 1.439 million units in September.

ProShares UltraPro Short 20+ Year Treasury ETF (TTT)

ProShares UltraPro Short 20+ Year Treasury ETF also offers three times the inverse performance of the ICE U.S. Treasury 20+ Year Bond Index. It has AUM of $529 million and an average daily volume of roughly 139,000 shares. The expense ratio comes in at 0.95%.

Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV)

Direxion Daily 20+ Year Treasury Bear 3x Shares offers three times the inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $677.6 million, Direxion Daily 20+ Year Treasury Bear 3x Shares charges 88 bps in fees and trades in a solid volume of 342,000 shares a day on average.

ProShares UltraShort 20+ Year Treasury ETF (TBT)

ProShares UltraShort 20+ Year Treasury ETF seeks two times 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 $1.2 billion and an average daily volume of 5 million shares. ProShares UltraShort 20+ Year Treasury ETF charges 89 bps in annual fees (read: Time for Short-Term Bond ETFs to Tap Outsized Yields?).

Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO)

Direxion Daily 7-10 Year Treasury Bear 3X Shares provides three times the inverse performance of the ICE U.S. Treasury 7-10 Year Bond Index. It charges 95 bps in annual fees and trades in an average daily volume of roughly 166,000 shares. Direxion Daily 7-10 Year Treasury Bear 3X Shares has accumulated $59.7 million in its asset base.

ProShares Short 20+ Year Treasury ETF (TBF)

ProShares Short 20+ Year Treasury ETF provides inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index. It has accumulated $550.9 million in its asset base and charges 90 bps in annual fees. Volume is solid at 1.5 million shares a day on average.

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).

Still, for ETF investors who believe that yields will continue to rise, any of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance and a belief that the trend is the friend in this corner of the investing world.

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ProShares UltraShort 20 Year Treasury (TBT): ETF Research Reports
 
Direxion Daily 20 Year Treasury Bear 3X Shares (TMV): ETF Research Reports
 
ProShares UltraPro Short 20 Year Treasury (TTT): ETF Research Reports
 
Proshares Short 20 Year Treasury (TBF): ETF Research Reports
 
Direxion Daily 710 Year Treasury Bear 3x Shares (TYO): ETF Research Reports
 
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