ProShares Launches Ultra Treasury ETFs (UBT, UST)

by on January 21, 2010 | ETFs Mentioned:

ProShares made an addition to its line of leveraged fixed income products on Thursday, launching the Ultra 7-10 Year Treasury (UST) and Ultra 20+ Year Treasury (UBT). UST seeks daily investment results that correspond to 200% of the daily performance of the Barclays Capital 7-10 Year U.S. Treasury Index, while UBT will seek to deliver daily amplified returns on the Barclays Capital 20+ Year U.S. Treasury Index.

ProShares has offered the UltraShort 7-10 Year Treasury (PST) and UltraShort 20+ Year Treasury (TBT) since April 2008. TBT in particular has seen its popularity surge as investors bet against long-dated Treasuries: the fund saw cash inflows of $2.2 billion in 2009 and is now the largest leveraged ETF by total assets.

The new ProShares products could compete with existing 3x leveraged funds from Direxion. The Daily 10 Year Treasury Bull Shares (TYD) seeks to deliver daily returns equal to 300% of the change in the NYSE Arca Current 10-Year Treasury Index, while the Daily 30-Year Treasury Bull Shares (TMF) is linked to the 30-Year U.S. Treasury Index. Direxion also offers a pair of inverse leveraged ETFs linked to Treasury benchmarks: the Daily 30 Year Treasury Bear Shares (TMV) and Daily 10 Year Treasury Bear Shares (TYO).

Trading Opportunities

U.S. Treasuries have historically been identified as offering risk-free returns, but that notion has been turned on its head in recent years. Treasuries surged towards the end of 2008 as investors flocked to safe haven investments. Between August 2008 and Christmas of that year, the iShares Barclays 20+ Year Treasury Bond Index Fund (TLT) gained almost 35%. The fund then lost more than 20% of its value in 2009. But perhaps even more astonishing than these significant swings in value of Treasuries is the daily volatility Treasuries have exhibited. Since August 2008, TLT has gained or lost at least 1% in more than 35% of trading sessions. The fund has swung by at least 2% in nearly one in ten trading days. And this occurred during a period of time that saw interest rates hold steady near all time lows.

The unprecedented market conditions obviously contributed to the volatility of Treasuries over the last two years, but government bonds could continue to see big swings in value going forward. The moves of the Federal Reserve are watched more closely than ever before, and every hint of a leaning on interest rate policy can send equity markets either surging or plummeting. Interest rates can’t stay at near zero levels forever, and once the Fed resumes activity in this regard, trading activity could surge.

Treasuries figure to be in focus in coming months for another reason as well: inflation. While most economists agree that increases in CPI will see an uptick from current levels, opinions as to just how high inflation will go vary significantly. Some see rates settling in the Fed’s “comfort zone,” while others are preparing to profit from a period of hyperinflation that crosses into double digits. Since Treasuries are fixed income investments, the real value of coupon payments can be impacted significantly by the prevailing rate of inflation. As the recovery progresses, Fed meetings and releases of CPI data will become must see events for everyone on Wall Street.

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Disclosure: No positions at time of writing.