Macro Muse: Expert Says: Short USTs, Yields Poised to Rise

Courtesy of one of our reader’s sighting this a.m.’s comments from Rareview Macro LLC’s “Sight Beyond Sight”, we’re compelled to cite the original source:

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

“…For the first time in months the setup is compelling enough for us to short US Fixed Income.

Earlier this morning the model portfolio sold short enough 30-year bond futures (symbol: USM4) at 135-28 to risk $50,000 USD per basis point. The reference point or last yield on the 30-year cash bond is ~3.40%. The first target in cash yield terms is 3.48% and the second is 3.52%. A stop at 3.36% (closing basis) has been placed. This is a short-term tactical trade with a risk-reward profile of three to one (3:1)…”

For those who embrace the above outlook, our insightful reader who pointed out the above sighting caveats: You can increase your chances by using a non-leveraged short ETF like TBF or simply shorting the long ETF. Beware: shorting bonds ETFs will result in you having the pay the dividends, which can be substantial.

Below includes a snapshot of (3) inverse-bond ETFs that could be considered by those seeking to hedge against or exploit a pending spike in UST yields. *

The ProShares Short 20+ Year Treasury (ARCA:TBF) seeks to match the inverse of the daily performance of the Barclays U.S. Treasury Bond market. The underlying index invests in Treasury securities with maturity dates greater than 20 years. Because of the correlation between bond prices and yield, the ETF hasn’t performed well at all over the past five years, which is due to the simple fact that bond yields have been falling over that period. However, as rates have ticked up over the past several months, the ETF has risen in value and is back over $30 per share.

ProShares Short 7-10 Year Treasury
Investors that are bearish on the outlook for bonds will have to make a decision on how far out they want to go on the maturity scale. ProShares also offers a more medium-term maturity inverse fund in the form of its ProShares Short 7-10 Year Treasury (ARCA:TBX). It seeks to match the inverse of the daily performance of the Barclays U.S. 7-10 Year Treasury Bond Index. Expenses are again high at 95 BPS and it has only been around since April 2011. As such, its asset level is quite small at $20.5 million. A similar alternative with more than quadruple the assets is the iPath US Treasury 10-year Bear ETN (ARCA:DTYS).

Direxion Daily 20+ Year Treasury Bear 3x ETF
The Direxion Daily 20+ Year Treasury Bear 3x ETF (ARCA:TMV) offers bond bills the opportunity to wager big on a rise in interest rates or significant drop in demand for Treasury Bond buying. The ETF seeks a 300% inverse benefit from the NYSE 20 Year Plus Treasury Bond Index. The expense ratio is again high for an ETF at 93 BPS, but the fund is so volatile that a 1% drag on profits or additional cost is going to be insignificant for investors. With the decrease in rates over the past few years, the ETF has basically been killed. Since the middle of 2009, the fund is down from $460 on a reverse-split adjusted basis – to a more recent $50. But with a reversal in rates, upside potential is just as great. This is not for the faint-hearted, whatsoever.