An ETF To Play Soaring Treasury Yields

Over the past few days, Treasury yields have been soaring heading back to seven month highs.  On Wednesday, 10-year yields briefly touched 3.56%, their highest level since May and are up nearly 118 basis points since August.  Furthermore, yields on 30-year bonds have shot up nearly 1 percent and five year bonds are up more than 100 basis points since August. 

This recent surge in Treasury yields could possibly be attributable to increased investor risk appetite which could further indicate that interest rates have bottomed out.  Past trends indicate that when an economy moves out of a recession and into recovery mode, one of the first things to happen is a rise in interest rates as investors tend to move their money into riskier investments and shun safer investments like US Treasuries.   Additionally, when an economy is in recovery mode, history indicates that inflation begins to rise as the economy grows which pushes bond prices down and yields up, hence pushing interest rates higher. 

In regards to the US economy moving into recovery mode, some forces that support this notion include improving manufacturing numbers reported by the Federal Reserve Bank of New York, improvements in industrial production numbers in November and a continued downward trend in initial unemployment claims.  Further support of an economic recovery comes from recent data from the retail sector and optimism gauge amongst small businesses.  According to the Commerce Department, retail purchases rose 0.8 percent which followed a 1.7 percent jump in October indicating consumer spending is increasing.  Additionally, the National Federation of Independent Business’s sentiment gauge rose by 1.5 points to 93.2, the highest level it has been since December 2007, as many businesses projected revenues to grow in the coming year. 

In a nutshell, the US economy is in recovery mode and there are numerous data points that indicate that interest rates have bottomed and are likely to continue to head upwards. We recommend purchase of TBT as a logical way to profit from the rise in rates and the fall in Treasury bond prices.

The ProShares UltraShort 20+Year Treasury (TBT), seeks daily investment results, before fees and expenses and interest income earned on cash and financial instruments, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Index and is likely to appreciate as interest rates increase.  TBT carries an expense ratio of 0.95% and prices have risen sharply over the past 4 months.

From a trend analysis perspective, TBT made an important bottom in August and prices have advanced 36% to the recent high established just this week. Our most reliable indicator of trendiness, the Average Directional Index (ADX), has been rising strongly since November.  All indications are that a strong and sustainable uptrend is in progress.

On the risk side of things, inverse leveraged ETFs move the opposite direction of the index they are trying to track and do so with some amount of tracking error.  The biggest risk factor in dealing with TBT is the fact that it is an inverse leveraged ETF which carries amplified risk exposure, in this case, twice the opposite daily performance of its index. The analysis at indicates that the current uptrend will remain intact until prices fall below $36.60.

The bottoming of interest rates is bound to have major repercussions across a wide spectrum of investments. In particular the rise in rates should strengthen the dollar and put a damper on rising commodity prices. Now would be a good time to review your portfolio and consider the long term impact of rising rates and a stronger dollar. In the meantime adding TBT to your portfolio will help mitigate the near term impact of rising rates while you make adjustments.

Disclosure: No Positions

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