ETFs that short Treasury bonds rise with yields
Soaring interest rates have investors buzzing around ETFs that bet against U.S. government debt.
A pair of ProShares ETFs that short Treasury bonds that mature in 20 years or more posted their best performance in almost two years Wednesday as yields on 10-year notes jumped to a seven-year peak and 30-year Treasurys rose to the highest level since 2014. TBF, which moves inversely to the ICE U.S. Treasury 20+ Year Bond Index, increased 1.8%, while TBT, which captures twice the inverse performance of that index, surged 3.6%.
Traders took notice. Roughly 1.8 million shares of TBF worth $42 million traded hands Wednesday, about four times the daily average over the past year. TBT, the ultra-short fund, was even more popular, as nearly 6.5 million shares worth $256 million changed hands, more than double the daily average over the past year.
“People are a little freaked out,” said Eric Balchunas, an ETF analyst at Bloomberg Intelligence. “If you see activity in these, it shows there’s a lot of people who are looking to bet on rates moving quickly.”
Investors flocked to the ultra-short bond ETF once again Thursday as few were willing to bet against persistent rising rates given the strong economic growth in the U.S. and a Federal Reserve set to continue tightening. About 4.3 million shares worth more than $175 million had changed hands, compared with about 2.5 million shares typically traded each day.
“People need to know what the rules are,” an industry consultant says.
The iShares fund reported $4.36 billion in new money as yield rose and the Federal Reserve prepares to shrink its balance sheet.
Even though they have posted positive returns, debt and equities markets have been moving in opposite directions for the better part of two decades.
Balchunas warned that investors should be careful with TBT, saying, “if rates shoot up, this thing will be in jackpot mode, but it can return and lose a lot quickly.”
Todd Rosenbluth, director of ETF research at CFRA, added that some investors could be using these risky products as a way to hedge.
“Investors have gravitated more to short and ultra-short term focused ETFs to protect against, rather than bet against, rising rates,” he said.