Treasury Yields: Profit From The End Of The Low Rate Era (TBF, TBT, IEF, TLT, SHY)

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March 22, 2012 11:48pm NYSE:IEF NYSE:SHY

Tom Essaye:  Last week most of the financial media focused on the fact that the stock market made new highs for the year and hit the highest level since 2006. Indeed impressive. But I don’t believe that was

the week’s most significant event …

I believe that the 10- and 30-year Treasury yields breaking out to the upside for the first time in months deserved a lot more attention.

The breakout was in reaction to the Fed announcement that basically said, given the recent economic strength, there was little chance for additional quantitative easing, while at the same time despite rising oil prices, they don’t see inflation as a risk at this point, signaling there is little chance of tightening of economic policy.

This change in stance is a significant one. It lead one Wall Street investment bank to declare the 30-year bond bull market over. And if there is a shift pushing bond yields higher, it has tremendous implications for many investments.

And as I’ve been telling my Million Dollar Contrarian Portfolio members, there are some incredible opportunities in Treasury yields once they start to rise.

Here are three of them …

First, and the easiest for professional investors, is to simply short the 10- or 30-year Treasury bond through the futures markets. This, however, requires that you’re comfortable trading futures and have a futures account, something most individual investors don’t have.

The second way is with ETFs. Luckily, there are ETFs that provide generally the same exposure as futures, although there are some things to be aware of with inverse ETFs.

A lot of people try to short yields via the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT). This is a leveraged ETF and is meant to rise 2 percent for each 1 percent drop in long-term Treasuries.

Just keep in mind that as with all leveraged ETFs, TBT is going to have a decent amount of slippage over the long term versus the underlying asset (in this case Treasury bonds).

[Editor’s note: To learn more about slippage, our ETF expert Ron Rowland explains it for you here.]

That’s why, generally speaking, I don’t think leveraged ETFs are good long-term investments. But at the same time if yields move much higher from here, TBT could pay off handsomely.

An option you could consider that will suffer a bit less from slippage and might be a better longer term holding is ProShares Short 20+ Year Treasury (NYSEARCA:TBF) — the non-leveraged version of TBT.

Finally a third way you can get “long” Treasury yields is by taking on all the debt you think you’ll need for the next couple of years.

Locking in rates now, at historic lows, is a way to effectively get long yields — because all your assets should begin earning more as yields rise. Meanwhile you’ll continue paying lower interest rates on the money you’ve borrowed.

The era of lower rates looks like it’s coming to an end …

It’s not ending tomorrow or next week or next month. But there is no doubt whatsoever in my mind that the tide has changed. And if you take advantage of this shift in rates and seize the opportunity, you’re bound to reap substantial rewards.

Related: ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT),  iShares Barclays 7-10 Year Treasury Bond Fund (NYSEARCA:IEF), ProShares Short 20+ Year Treasury ETF (NYSEARCA:TBF), iShares Barclays 20+ Year Treas Bond ETF (NYSEARCA:TLT), Barclays 1-3 Year Treasury Bond ETF (NYSEARCA:SHY).

Best wishes,

Written By Tom Essaye From Money And Markets

Money and Markets  (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, and Michael Larson. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and MarketsMoney and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit

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