Trend: Bond yields are rising (reflecting inflationary expectations) which makes bonds lose value.
Short Treasury ETFs TBT, PST, TYO, and TMV allow investors and traders to take advantage of bond prices dropping as yields increase. Some observers warn that the Fed and/or Treasury will try to take action to stop the decline in bond prices. ETF Grind recommends the TBT to take advantage of this trend in the excerpt below.
Link: TBT's Day Has Come -- Seeking Alpha.
Now reality is finally catching up with the treasury market. Since March 18 10-year yields have risen from 2.5% to just under 3.5%. The 20-year note has performed similarly, now approaching 4.5%.
Investors who have been patiently waiting in the Proshares UltraShort 20-year Treasury (TBT), an ETF which shorts the 20-treasury note, are finally reaping their rewards as the fund is up 17% since mid March. As investors start to worry about the increasing risks of inflation, credit downgrades, or even a US sovereign default, they are demanding higher yields on US debt. Higher yields mean lower prices, and a higher TBT, as the leveraged fund aims to return 200% the inverse of long dated treasuries.
Rates above 5% would mean a healthy return for the fund. But the macroeconomic fundamentals of the American economy would suggest a 20 year note closer to 10%, meaning the potential for upside is huge.
Other ETF plays on rising long term rates exist. The ProShares UltraShort Lehman 7-10 Year Treasury Bond (PST) shorts the middle of the treasury market. But rates are expected to explode highest on the longer end of the curve, so TBT would likely be a better choice.
Direxon carries two 3x leveraged ETFs that short treasuries. The Direxion Daily 30-Year Treasury Bear 3x Shares (TMV) tracks 3x the inverse of the 30 year note, and the Direxion Daily 10-Year Treasury Bear 3x Shares (TYO). Both are too volatile to hold over the long term, but would be great to own the day before the US loses its AAA credit rating, should that doomsday come.
The treasury market is poised for a collapse not unlike that of the subprime market two years ago.
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