Ultrashort Lehman 20+Year Treasury Proshares Allows Investors to Go Bearish on Treasuries

Treasury bonds are at all time lows in yield as investors have fled to their safety and security. Many think the market is a bubble. For those that believe it, two ETFs allow you to short the Treasury market.

Yields on Treasuries have fallen to levels not seen since the 1940s.  According to the BestCashCow rate tables, 3 year Treasuries are selling at  .05% while 10 year Treasuries are selling at 2.67%.  That's down from 3.22% and  3.89% respectively at this time last year.  There are several reaons for this:

  • Investors have sought the safety and security of an asset backed by the US government as economies have crashed worldwide.  This is especially true for short term Treasuries are investors look for a good short term place to park their money.
  • The Federal Reserve has indicated it may directly purchase Treasuries in the future.

Many investors believe that the Treasury market is a bubble.  The value of a bond rises and falls inversely to its yield.  Thus, as the yield on new Treasuries has fallen, the value of old T-bills has risen.  That only makes sense.  Would you pay more for a bond paying 3.22% per year or one paying ,05% per year. 

But the opposite can also happen.  As rates begin to rise, the face value of the Treasury already purchased will begin to decline.  Many believe this decline will happen in 2009 for two reasons:

  • The economy will start to respond to the massive stimulus coming from the Obama administration.
  • Investors will demand higher yields as the US government and goverment's worldwide issue more and more debt.  This is already beginning to happen in Germany, which has faced several failed auctions in the past year.

I always believe in buy-low and sell high so this looks like a golden opportunity.  I don't know exactly when Treasury yields will pick up but it will happen at some point in the next 12-18 months and when that happens someone is going to make a lot of money.

If you do think Treasury values will fall the the Ultrashort Lehman 20+Year Treasury Proshares (TBT).  Barrons reports that:

"This ETF moves at twice the inverse of the daily price movement in Treasury notes and bonds. Since the summer, the 20+Year Proshares has fallen almost 50% as Treasury prices have surged. If Treasury yields return to June levels, the ETF could double in price."

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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