Bet on Inverse Treasury ETFs Now to Play Rise in Yields

The 10-year U.S. Treasury yield soared to its highest point in two years on Jan 18, 2022, hovering around 1.87%. Rates have been rising in the United States since the start of 2022 on the Fed’s rate hike bets. Higher inflationary expectations emanating from supply chin disruptions as well as higher crude prices should make Fed members comfortable with rate hikes in the coming days.

As a result, investors are wagering on 89.9% chances of a 25-bp interest rate hike in March, according to CME Group's FedWatch Tool, and a 48.4% chance that rates will rise again by 25 bps in May and 43.9% probability that the rates will hover around 75-100 bps after the Fed’s June meeting. About 45.1% believe that 75-100 bps of rates will be seen after the meeting in July. If this happens, there will be three Fed rate hikes in the coming six months.

Apart from these rate hikes, the U.S. central bank has already paced up QE tapering, upped its economic growth projections, raised its inflation outlook and cut the unemployment rate projections. The central bank had plans to buy $60 billion per month of bonds in combined Treasuries and agency mortgage-backed securities starting in January, down from $90 billion in December and $120 billion from the start of the pandemic through November.

Time for Inverse Bond ETFs?

Yields move inversely to prices. Hence, iShares 20+ Year Treasury Bond ETF TLT has lost 5.5% this year. But there is a way to cash in on this rising-yield trend, in the form of inverse Treasury ETFs.

How Do Inverse ETFs Work?

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.

Since most of these funds seek to attain their goals on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark, over a longer period when compared to a shorter period (such as, weeks, months or years) due to the compounding effect.

ETFs to Consider

ProShares UltraShort 20+ Year Treasury TBT

The ProShares UltraShort 20+ Year Treasury seeks daily investment results, before fees and expenses that correspond to two times the inverse of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. The fund charges 92 bps in fees. TBT is up 8.2% this year.

ProShares Short 20+ Year Treasury ETF TBF

The ProShares Short 20+ Year Treasury seeks daily investment results, before fees and expenses, that correspond to the inverse of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. The fund charges 94 bps in fees. TBF is up 4.3% this year.

Direxion Daily 20 Year Treasury Bear 3X Shares TMV

The Direxion Daily 20+ Year Treasury Bear 3x Shares seek daily investment results, before fees and expenses, of 300% of the inverse of the performance of the ICE U.S. Treasury 20+ Year Bond Index. The expense ratio of TMV is 1.01%. TMV is up 12.4% this year.

ProShares UltraPro Short 20+ Year Treasury TTT

The ProShares UltraPro Short 20+ Year Treasury seeks daily investment results, before fees and expenses that correspond to three times the inverse of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index.  The expense ratio of TTT is 0.95%. TTT has gained 12% this year.

ProShares Short 7-10 Year Treasury TBX

The ProShares Short 7-10 Year Treasury seeks daily investment results, before fees and expenses that correspond to the inverse of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. Expense ratio comes in at 0.95%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.