Investors have been slowly embracing exchange-traded products as a tool for accessing fixed income exposure in recent years, gradually becoming more comfortable with the nuances of bond ETFs and the potential limitations involved when combining this product structure and asset class. As long-term buy-and-holders have increased usage of ETFs as a way to maintain fixed income exposure, those investors with more of a short-term focus have also turned toward ETFs as an efficient way to bet against bonds.
In recent months investors have seemingly adopted an increasingly bearish outlook on fixed income in general, expressing concerns that a confluence of economic factors and developments are pointing toward a tough stretch for all types of bonds, from Treasuries to high yield debt. Contracting credit spreads on corporate debt has raised some red flags, while the recent warning from S&P on the outlook for the U.S. seemed to echo concerns that many investors had been voicing in recent months.
The increasingly negative outlook for U.S. Treasuries is perhaps evidenced by the tremendous inflows into ETFs offering ways to bet against this corner of the market. By far the most popular of those is the ProShares UltraShort 20+ Year Treasury (TBT), which has more than $6 billion in assets. Nearly $600 million flowed into TBT in the first quarter of the year, highlighting the growing interest in betting against U.S. Treasuries.
Investors looking to utilize ETFs to establish a short position against fixed income have a number of different options available to them. In addition to a slew of products offering leveraged inverse exposure, there are 11 ETFs in the Inverse Bonds ETFdb Category that cover all types of fixed income securities and a wide range of maturities.
Long-dated Treasuries in particular have fallen out of favor with investors, hit by the double whammy over anxiety related to debt issued by the U.S. government and the heightened duration risk. Rising interest rates have an adverse impact on bonds of all duration, with longer maturities generally translating into increased sensitivity to rate changes. Though a rate hike isn’t imminent, accelerating food prices have stoked the inflationary flames - perhaps setting the stage for a tightening campaign.
For investors looking to bet against long-term Treasuries with an inverse ETF, there are two options:
- ProShares Short 20+ Year Treasury (TBF): This ETF seeks daily results that correspond to the inverse of the daily change in the Barclays Capital 20+ Year Treasury Index. That same benchmark serves as the basis for the iShares Barclays 20+ Year Treasury Bond Fund (TLT). That ETF has an effective duration of just over 15 years.
- Direxion Daily 20+ Year Treasury Bear 1x Shares (TYBS): This Direxion fund offers similar exposure, seeking to deliver daily returns equal to the inverse of the NYSE 20+ Year Treasury Bond Index. At the end of February, that underlying index consisted entirely of bonds with at least 24 years to maturity; almost 81% of the index had a maturity of at least 27 years and 31% of the index had more than 30 years to maturity.
Intermediate Term Treasuries
For investors seeking to short intermediate term Treasuries, there are also multiple options available:
- ProShares Short 7-10 Year Treasury (TBX): This ETF offers inverse exposure to the Barclays Capital 7-10 Year U.S. Treasury Index. That index is linked to the iShares Barclays 7-10 Year Treasury Bond Fund (IEF), which has an effective duration of about seven years and a 30-day SEC yield of 3.1%.
- Direxion Daily 7-10 Year Treasury Bear 1x Shares (TYNS): This ETF is linked to the NYSE 7-10 Year Treasury Bond Index, a multiple-security fixed income index that aims to track the total returns of the intermediate 7 to 10 year maturity range of the U.S. Treasury bond market.
High yield debt has delivered impressive yields to investors over the last couple of years. But more recently, narrowing credit spreads have raised red flags for some, as the relatively paltry yields from this asset class may not be sufficient to justify the ample risk that remains amidst a fragile economic recovery. Recently, the 30-day SEC yield on the ultra-popular iShares iBoxx $ High Yield Corporate Bond Fund (HYG) had dropped to about 6.3%.
Investors looking to bet on another junk bond collapse have the ProShares Short High Yield (SJB) as one option. This ETF seeks to deliver daily results equal to the inverse of the index to which HYG is linked.
Investment Grade Corporates
Similarly, yields on investment grade corporate bonds have been depressed and credit spreads narrowed in recent months. The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) recently had an average yield to maturity of just 4.3%. The ProShares Short Investment Grade Corporate (IGS) offers an opportunity to gain inverse exposure, on a daily basis, to the index underlying IGS.
Total Bond Market
For investors looking to gain inverse exposure to the broad U.S. investment grade bond market, the Direxion Daily Total Bond Market Bear 1x Shares (SAGG) could be one option. This fund seeks daily results corresponding to the inverse of the Barclays Capital U.S. Aggregate Bond Index, the benchmark that the ultra-popular AGG and BND seek to replicate.
Disclosure: No positions at time of writing.
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