TBF ProShares Short 20 plus Year Treasury

Although the economy has seemingly bottomed out, investors still remain very skeptical of the stock market. As a result, demand for fixed income securities remains very high across the board but especially so in the ultra-safe Treasury market. In this corner of the investing world, the robust demand continues to surprise advisors who have been pleading with investors to consider other destinations for their wealth. This was no more evident than in a recent mid-term bond auction for American Treasury debt of the 10-year variety.

In this release, $21 billion was sold at a paltry 1.9% yield, crushing the 2.0% level set in the September auction in 2011. Furthermore, the bid-to-cover ratio was at 3.29, easily beating out the 3.09 average of the last eight releases, suggesting that demand for ultra-safe assets is still quite high. Similar records were also seen in various other types of Treasury securities, hinting that the bond market bull may still have some legs left after all (see Australia Bond ETF Showdown).

Yet, there is also reason to believe that we are in the death throes of the Treasury bond market surge and that yields will soon turn the corner. Stock markets have been seeing less volatility as of late and yields on stocks are far higher than bond yields, a factor which should entice many to make the switch at some point this year. Furthermore, if one takes the monthly average yield for the ten year bond since 1953, the resulting figure, 6.24%, comes in far higher than today’s current reading, implying that a reversion to the mean would bring in a roaring bear in bonds (read Go Local With Emerging Market Bond ETFs). 

In this scenario, interest rates would rise and bond prices would slump back to earth making those who have taken the short side of a trade in the Treasury market huge winners. Given that yields don’t exactly have much further to go down, some may consider the time ripe for a play on the short side of the Treasury market. While this may be difficult to do outside of a futures account, this trade is pretty easy to make via ETFs. Below, we highlight three such funds that can give investors access to the inverse of the Treasury curve and could benefit from a bear market in bonds:

iPath U.S. Treasury 2-Year Bear ETN (DTUS)

For those unwilling to take on a lot of interest rate risk, DTUS could be the way to go. This ETN, which exposes investors to credit risk of Barclays but eliminates tracking error, looks to give investors inverse access to the short side of the Treasury curve. This is done by tracking the inverse performance of the Barclays Capital 2Y US Treasury Futures Targeted Exposure Index and is one of the few options for those seeking short-durations in the space (see Do You Need A floating Rate Bond ETF?)

The fund charges 75 basis points a year and does low volume of about 7,200 shares a day. This comes on AUM of about $17.4 million for this fund that was launched in August of 2010. In terms of performance, DTUS has fallen by about 16.6% in the past year as the bull market in bonds has stormed on. However, the fund has lost just 2.4% in the past quarter as the Treasury market has run into some resistance in terms of pushing yields even lower.

Direxion Daily 7-10 Year Treasury Bear Fund (TYNS)

For a targeted play on the mid part of the curve—which should give a nice mix of risk and reward—TYNS could be a great choice for those seeking unleveraged exposure. The fund tracks the inverse performance of the NYSE 7-10 Year Treasury Bond Index which seeks to give investors access to securities that are issued by the U.S. government and mature between 7-10 years from now. Currently, the product has pretty even exposure across each of the three component years (read The Best Bond ETF You’ve Never Heard Of).

This Direxion product is a pretty new one, having launched in March of 2011. However, the fund does charge investors a pretty low expense ratio of 65 basis points after waivers, although, according to the fact sheet, this is expected to go up to 0.73% after April 1^st, 2012. For performance, the fund has done slightly better than some of its counterparts along the curve as the fund has fallen by 13.2% since March of last year.  Furthermore, over the past three months, the fund has lost just 1.4%, suggesting that the middle part of the curve could be closer to a bear market than some think.

ProShares Short 20+ Year Treasury Bond Fund (TBF)

For those who truly believe a bear market in bonds is at hand, it is hard to argue with buying TBF or other products with high duration levels. This fund in particular seeks to track the inverse daily performance of the Barclays Capital 20+ Year U.S. Treasury Index, a benchmark which holds 16 constituents in total. All of these bonds mature in at least 20 years from now while most come due closer to 30 years from today as the index’s weighted average maturity is 28.1 years (see Ten Best New ETFs Of 2011).

TBF is by far the most popular and liquid fund on the list as the ETF has close to $775 million in AUM and trades more than half a million shares a day. Unfortunately, the fund does have higher expenses as well; total costs come in at 95 basis points a year for this long-dated fund.  Yet, despite the fund’s popularity, it has been an extremely rough ride over the past 52 weeks as the product has sunk by close to 30.7%, thanks in large part to its highly sensitive nature. There isn’t much good news in shorter time-frames either as the product has slumped by 6.3% over the past three months, outpacing the losses of the shorter-dated funds. However, the fund has risen by 0.4% in the past month of trading and due to this higher volatility, it could be a better choice if the bull market ever ends in the bond world.

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