Reading Time: 3 Minutes
Can you make money betting against bonds? Read this post to find out.
Betting Against Bonds -- Inverse-Bond ETF
Into betting against bonds? Not sure? How about checking out an Inverse-Bond ETF. Ok, let’s just say want to speculate on rising bond yields. If you don’t really care about income then no problemo: There are plenty of “inverse” exchange traded funds and notes to pick and choose from. They have them in everything from stocks, bonds, treasuries,and commodities like gold. You’ll go long the inverse ETF. Basically, what you expect to happen is that your ETF choice price will increase as interest rates rise and bond prices get kicked to the curb.
One of the most popular inverse-bond ETFs is the Proshares Ultrashort 20+ Year Treasury. The ticker is TBT. The TBT moves TWICE the opposite move of the Barclays Capital Long-Term T-Bond Index.
Solid video explaining the decay mentioned in this article. Pay Attention!
Betting Against Bonds -- Inverse-Bond ETF
So, if the Barclays T-Bond index dumps 1.5% the ETF typically moves up 3.0%. So, if you’re long TBT you just made some paper cash. If the index rises 1.5% you took a hit for 3.0%. Yes, these suckers are leveraged. Another way to look at this (if you’re kind of nerdy like me) is when yields rise and bond prices drop you’ll make cash. If bond prices rise and yields drop you’ll lose cash. Still another way to look at it: if the iShares Lehman 20+ Year ETF ticker TLT goes up the TBT should go down twice as much.
Easy enough, right? Not really. You must consider one of the problems that come with going long TBT. The ETF achieves its objective on a daily basis. What does that mean? Well, you can speculate on daily fluctuations and guess correctly on rates increasing but get very little return over extended periods. This has to do with compounding.
Betting Against Bonds -- Inverse-Bond ETF
So, if you can’t buy and hold and make cash what is TBT good for? Well, you could make some quick cash trading this ticker. For example, you really believe that there will be a positive announcement and that employment will rise. You could pick up some shares of TBT before the announcement then take your money and run. Take a look at the Direxion Daily 7-10 Year Treasury Bear 1x Shares Ticker: TYNS (if your interested in shorting the NYSE 7-10 Year Treasury Bond).
Remember to get in with a stop-loss…this is trading not investing so minimize your risk and exposure. Tread lightly…if at all.
Remember: Betting against bonds with an inverse-bond ETF isn’t for everyone. Examine the risks and protect your assets.
Source Material:
Kosnett, Jeffrey R. “ETFs That Bet Against Bonds” Kiplinger’s. March. 2011: 28. Print.
Click Here for the Best Books on Bonds
Related posts:
Recent Comments