Inverse Treasury ETFs to Fly Higher on an Aggressive Fed

The U.S. fixed income market has been piling up heavy losses with the rout accelerating especially after a hawkish comment from Federal Reserve Governor Lael Brainard. Investors are betting on the steepest Fed tightening in almost three decades. The 10-year Treasury rose to a three-year high while 2-year and 5-year yields hit the highest since January 2019 and after December 2018, respectively.

In such a scenario, investors should put their money in ETFs that bet against U.S. Treasury bonds. For them, we have highlighted some inverse or leveraged inverse ETFs that could be worth buying for huge gains in a short span. These include ProShares Short 20+ Year Treasury ETF TBF, ProShares UltraShort 20+ Year Treasury ETF TBT, Direxion Daily 20+ Year Treasury Bear 3x Shares TMV, ProShares UltraPro Short 20+ Year Treasury ETF TTT and Direxion Daily 7-10 Year Treasury Bear 3X Shares TYO.

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. All these have witnessed solid gains to start the year.

Current Bond Market Trends

Federal Reserve Governor Lael Brainard indicated an aggressive approach to shrinking the central bank’s balance sheet. He hinted that the central bank will start “to reduce the balance sheet at a rapid pace as soon as May meeting.” The central bank is expected to follow a more aggressive path in raising rates to fight the 10-year high inflation after raising rates by 25 bps in the latest FOMC meeting (read: Fed Rate Hike to Bring These ETF Areas to the Forefront).

The current pricing suggests a 0.5% bps hike in May and a cumulative boost of 2.5% to the benchmark rates through the end of the year, from the near-zero level at the start of 2022. Fed funds futures traders expect the Fed's benchmark rate to rise to 2.60% by February from the current 0.33% According to the CME Group's FedWatch, traders are betting on half-point moves higher in the Fed Funds rate at the next three Fed meetings in May, June and July.

ETFs to Play

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.

ProShares Short 20+ Year Treasury ETF has accumulated $679.1 million in its asset base and charges 92 bps in annual fees. Volume is solid at 3.8 million shares a day on average. The ETF has gained 13.6% so far this year.

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 $1.3 billion and an average daily volume of 9.1 million shares.

ProShares UltraShort 20+ Year Treasury ETF charges 90 bps in annual fees and is up 27.8% so far this year.

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 (read: Fearing an Inverted Yield Curve? Short Financials With ETFs).

With AUM of $382.6 million, Direxion Daily 20+ Year Treasury Bear 3x Shares charges 88 bps in fees and trades in a solid volume of 627,000 shares a day on average. It has surged 42.6% this year.

ProShares UltraPro Short 20+ Year Treasury ETF (TTT)

ProShares UltraPro Short 20+ Year Treasury ETF also offers three times the inverse performance of the same index. It has AUM of $244.4 million and an average daily volume of roughly 198,000 shares. The expense ratio comes in at 0.95%.

ProShares UltraPro Short 20+ Year Treasury ETF has gained 42% so far this year.

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.

Direxion Daily 7-10 Year Treasury Bear 3X Shares charges 95 bps in annual fees and trades in an average daily volume of roughly 135,000 shares. It has accumulated $39.3 million in its asset base and has risen 26.6% this year.

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 at least in the near term, 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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