ETFs designed to short Treasuries are rallying to open the year as U.S. government debt is off to its worst start to a year since 2009.
Treasury bonds are down nearly 1% so far in 2013.
"It was the biggest decline for a first week since the Treasury was preparing to ramp up debt sales four years ago as it tried to snap a recession," Bloomberg News reported Tuesday. "Bonds slid after the Federal Reserve indicated it may stop its debt purchases in 2013 and as lawmakers averted the so- called fiscal cliff of spending cuts and tax increases."
Treasury yields are inching higher and bond prices are falling but it's difficult to pin down exactly why, due to the Fed's unprecedented intervention in the bond market after the financial crisis. Yields could be rising on investors taking more risk and moving away from safe havens on expectations the economy will improve.
Inverse Treasury ETFs have moved up along with yields. The exchange traded products move in the opposite direction of bond prices.
For instance, the ProShares UltraShort 20+ Year Treasury ETF (TBT) added 8.3% over the past week and the Direxion Daily 30-Year Treasury Bear 3x Shares ETF (TMV) gained 12.4%. Trading volume in inverse Treasury related ETFs is rising as well.
In comparison, the iShares Barclays 20+ Year Treasury Bond Fund (TLT) has been falling off its November high. The ETF dipped 5.4% over the past month as yields on the benchmark 10-year Treasury notes rose above 1.9%.
"Investors interested in this fund essentially think the unprecedented moves by the Federal Reserve to pump liquidity into the financial system will ultimately result in higher inflation and sinking dollar value," Morningstar analyst Timothy Strauts said in a profile of TBT. "Investors should also hold the thesis that the flight to quality will ultimately reverse itself, causing Treasury rates to rise."
Inverse ETFs seek to generate the opposite, or -100%, of the underlying asset on a daily basis. Leveraged inverse ETFs try to reflect two or three times the opposite, or -200% and -300%, of the underlying asset on a daily basis. Investors should be aware that inverse and leveraged products are not suitable for long-term buy-and-hold investors.
Some other inverse Treasury Bond ETFs include:
- ProShares Short 20+ Year Treasury ETF (TBF)
- ProShares Short 7-10 Year Treasury ETF (TBX)
- iPath US Treasury 10-year Bear ETN (DTYS)
- Direxion Daily 10-Year Treasury Bear 3x Shares ETF (TYO)
- ProShares UltraShort 3-7 Year Treasury ETF (TBZ)
Max Chen contributed to this article.
Full disclosure: Tom Lydon's clients own TLT.