Want To Really Take Advantage Of A Rise In Interest Rates? Try Leveraged Treasury Funds

Includes: TBF, TBT, TMV
by: Dave Dierking

Fixed income investors may have noticed a sizable change in the interest rate curve recently. While rates on the short end of the curve remained relatively unchanged, rates on 10-year notes and longer moved up around 50-60 basis points. That means that owners of corporate and government bonds and funds probably saw their investment values take a hit.

It's probably reasonable to assume that the bull market in bonds probably doesn't have a whole lot more room to run. Even after the upward move in the long end of the curve, rates are still at historically low levels and as the economy recovers rates have almost nowhere to go but up.

That would limit the long-term return potential of fixed income investments but that doesn't mean that you can't profit from the long-term up trend in rates. There are a number of funds and ETFs that are designed to either follow the movements of interest rate curve or move in inverse to bond prices, which is essentially the same thing. Depending on your appetite for risk, some of these investments are built to double or even triple the movements of interest rates.

Here are a few examples depending on how risky you want to get.

ProShares Short 20+ Year Treasury (NYSEARCA:TBF)

This is your generic short fund designed to perform the opposite of long-term Treasury prices. Since Treasury prices and Treasury yields move in opposite directions, you're essentially matching the movement of interest rates (although the changes you see on a daily basis can vary a bit).

The ProShares family of funds has been around for about 15 years and specializes in index, leveraged and inverse investments. This fund returns the inverse of its index, which can be risky enough on its own. This could be appropriate as part of a diversified portfolio unless you want to get especially risky. In which case, you could choose…

ProShares Ultra Short 20+ Year Treasury (NYSEARCA:TBT)

The fund returns twice the inverse of Treasury bond prices and, therefore, twice the movement in interest rates. In theory, if Treasury prices decline 1%, this fund will return 2% and vice versa.

Keep in mind that these funds are designed to return double the opposite of the underlying index on a daily basis. As the market tends to move up and down the overall return you see over a longer period like a year or more could end up being much less than double the inverse of the index.

Obviously, you need to be very comfortable with the risk and potential downside of this fund. If you are and you want to throw caution completely to the wind, you could also choose…

Direxion Daily 20+ Year Treasury Bear 3X (NYSEARCA:TMV)

As the name suggests, this fund is designed to return triple the inverse of Treasury prices. It's essentially the same as the fund above with more risk and volatility. I'm not sure there's much more that can be said about this fund that we haven't already discussed with the funds above except that a fund like this shouldn't really be a core part of your portfolio. The risk/return relationship makes this more appropriate for the "fun money" portion of your portfolio.


In order to achieve the inverse of the Treasury bond indices and to achieve them at double or triple an index's value, most of the funds heavily use derivatives and other similar securities to achieve their objective - not necessarily Treasuries themselves. As a result, expense ratios for these funds tend to be higher than average. The three ETFs listed all charge about 1% annually and those fees can eat away at the returns you see.

These funds can carry a significant degree of risk. But if you're correct in where you think rates are going, the risk can be worth the reward.

Disclosure: I am long TMV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.