Shorting Long-Term Treasuries: Four Different ETF Plays

by on September 21, 2010 | ETFs Mentioned:

With lingering uncertainty over the outlook for the global economy, safe havens have generated a tremendous amount of interest this year. While much of the attention has focused on gold and its continued run to new record highs, it is another asset class that has stolen the show in 2010. Long-term Treasuries have climbed steadily higher during 2010, defying the predictions of many “experts” and thriving on a wave of risk aversion. The popular Barclays 20-Year Treasury Bond Fund (TLT) has gained about 17% on the year, while the Vanguard Extended Duration Treasury Index ETF (EDV) has added more than 23%.

Now, with equity markets showing some signs of life, investors are beginning to wonder if the impressive run-up is due for a sharp reversal. Peter Schiff is just one well-known investor who thinks a huge bubble has formed under Treasuries. “The bond market is the mother of all bubbles right now and I think when it bursts the losses will dwarf the combined losses of the stock market bubble and the real estate bubble,” said Schiff during a recent TV interview. “This decade will be the worst decade for bonds in U.S. history.” [see Seven ETFs To Invest Like Peter Schiff]

Besides the concerns harbored by Schiff relating to the creditworthiness of debt issued by the U.S. government, there are other factors that could potentially send long-term bonds sharply lower. Interest rates in much of the developed world continue to hover around record lows. And while a tightening campaign from Bernanke & Co. certainly isn’t imminent, rates really can’t go much lower. Odds are that economic fundamentals will eventually stabilize and inflationary concerns will become more significant, resulting in increasing interest rates. Because of the extended durations of long-term Treasuries, such a development could be particularly devastating for this asset class [also see Ten ETFs To Own If (When) The Fed Raises Rates].

ETFs To Short Treasuries

Some investors concerned about a potential bubble under long-term bonds have moved to shorten up their duration exposure, tilting fixed income exposure towards lower-yielding securities that won’t be battered as severely if rates head higher or investors regain some of their appetite for risk. For more aggressive investors looking to capitalize on a potential deflation of a bond bubble, there are a handful of ETF options designed to provide inverse exposure to long-term Treasuries [for more ETF insights, sign up for our free ETF newsletter]:

  • ProShares Short 20+ Year Treasury (TBF): This inverse ETF seeks to deliver daily results that are equal to -100% of the Barclays Capital U.S. 20+ Year Treasury Index, a benchmark consisting of long-dated Treasuries. Because TBF resets exposure daily, the returns over multiple trading sessions won’t necessarily correspond to the inverse of the related benchmark; performance over extended periods of time will depend on the path taken by the bond index.
  • ProShares UltraShort Barclays 20+ Year Treasury (TBT): This fund is similar to TBF, but instead offers -200% leverage on the same index. That means that TBT seeks to deliver daily results that correspond to -200% of the change in the reference benchmark. Reflecting the tremendous popularity in short exposure to long-dated Treasuries in the current environment, TBT has become the largest leveraged ETF on the U.S. market; assets currently stand at more than $4 billion [read 2010: Year Of The Bond ETF].
  • Direxion Daily 20 Year Plus Treasury Bear 3x Shares (TMV): This ETF provides even more leverage, seeking to deliver daily results equal to -300% of the daily return on the NYSE 20 Year Plus Treasury Bond Index. The rally in bond markets has send TMV down nearly 50% this year, but this leveraged ETF could be a powerful tool if the bond bubble begins to deflate.
  • PowerShares DB 3x Short 25+ Year Treasury Bond ETN (SBND): This product also offers 3x inverse leveraged exposure to long-dated Treasuries, but is different from TMV in two key aspects. First, SBND’s exposure resets on a monthly basis, where as the timeframe maintained by TMV is daily in nature. Second, SBND is structured as an exchange-traded note, while TMV is an ETF.

It’s worth noting that long-term bonds have been written off once already in the recent past–right before they began their skyward climb. In late 2009, countless investors were convinced that inevitable rate hikes would deal a blow to bond investors, hitting those with the longest durations the hardest. With lingering uncertainty over the further quantitative easing programs from the Fed and the overall strength of the economy, the Treasury market could continue to exhibit higher-than-normal volatility for some time. That could create interesting opportunities for investors in the aforementioned ETFs–as well as considerable risk [also read What's Gotten Into Treasury ETFs?].

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Disclosure: No positions at time of writing.