How To Play A Treasury Bubble With ETFs

by on March 19, 2012 | Updated March 21, 2012 | ETFs Mentioned:

U.S. Treasuries were the talk of the town in 2011 as this asset class shielded investors from the rampant volatility that ripped through equity markets as debt woes on both sides of the Atlantic ocean intensified. However, encouraging economic data releases on the home front have paved the way higher for stocks in recent months, leading some to believe that government bonds may be floating in overbought territory [see also 3 ETF Trades For The Next Euro Zone Debt Crisis].

Recent developments in the Euro zone have further bolstered confidence that the global economic recovery can and will persevere despite overarching risks. As the cloud of uncertainty looming over financial markets slowly disperses, many are left wondering if U.S. Treasuries can retain their appeal in an improving economic environment.

In a recent article in, author Joe Weisenthal offers a compelling take on the current state of the domestic government bond market. Weisenthal cites a recent letter from Scott Minerd of Guggenheim Partners which argues that Treasury yields are poised to rise thanks to a self-sustaining recovery on the home front. “Treasury yields remain unsustainably low,” writes Minerd. “I think the Fed’s policy actions will keep rates lower than they normally would be, but I believe the improving U.S. economy will put upward pressure on rates over the next six to twelve months.”

Simply put, improving expectations for economic growth and a historically low-rate environment are two factors which have lead many to believe that Treasuries are overvalued at current levels [see also Bond ETFs For Every Objective].

Ways To Play

Investors who are looking to take a bearish stance on government bonds have a number of tools at their disposal thanks to the evolution of the ETF industry. Below we highlight several inverse products which could serve as appealing instruments for those looking to establish short exposure to U.S. Treasuries:

  • ProShares Short 20 Year Treasury (TBF): This ETF measures the inverse performance of the Barclays Capital U.S. 20+ Year Treasury Index; in essence, TBF provides investors with exposure to a short position in U.S. Treasury securities that have a remaining maturity of at least 20 years.
  • ProShares UltraShort 20 Year Treasury (TBT): More experienced investors may opt for this ETF, which is a 2x leveraged version of TBF. Investors should also note that exposure is reset on a daily basis.
  • Direxion Daily 20 Year Treasury Bear 1x (TYBS): This ETF measures the inverse performance of an index consisting of long-term Treasuries, with a maturity range of 20 years and greater.
  • Direxion Daily 20 Year Plus Treasury Bear 3x (TMV): This Direxion offering is linked to a 3x leveraged version of the same index tracked by TYBS. As the title suggests, exposure is reset on a daily basis.
  • FactorShares 2x S&P 500 Bull/T-Bond Bear (FSE): This one-of-a-kind spread ETF allows investors to gain short exposure to Treasuries without going all in so to speak. FSE tracks the difference in daily returns between U.S. equities and long-dated Treasuries by establishing a long position in the S&P 500 Index and a short position in U.S. Treasury bond futures. This ETF can be expected to perform well as long as equities outperform Treasuries on a relative basis.
ETFs with different targeted maturities are also available [see all Treasuries ETFs], however, the longer-dated securities should fare worse assuming bearish pressures developed in the Treasury market [see Inverse Bond ETFs: Highlighting All The Options].

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Disclosure: No positions at time of writing.