The U.S. economy is finally showing signs of strength this year. Job growth in June hit the highest level since September 2008. Other data points like manufacturing and consumer confidence in recent days also came in favor of economic growth. While all these data points encourage a bullish investing environment, the fixed-income segment feels the gloom thanks to rising rate concerns.
Consequently, the three decade long bond bull market is about to change as the Fed is preparing to fully wrap up its QE program (in the wake of better economic numbers) that kept the rates low synthetically so far and in turn boosted bond prices.
To fight the situation, fund issuers have been trying several options like preferred stock ETFs. A straightaway approach of shorting U.S. Treasuries also warrants consideration. Probably, spurred by this feeling, Barclays has come up with a new product recently in the pursuit of U.S. Treasury Aggregate ETN. The product hit the market on July 14, 2007.
Barclays Inverse US Treasury Aggregate ETN in Focus
The ETN looks to reflect the performance of the Barclays Inverse US Treasury Futures Aggregate Index. The investment objective of the index is to follow the sum of the returns of short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts, as per etfdb. The fund costs 43 bps a year.
How might it fit in a portfolio?
Of late, investors are growing increasingly concerned about rising rate risks and stock market turbulence thanks to relentless geopolitical concerns, be it Russia-Ukraine tensions, militant attacks in Iraq or Israel’s attacks on Gaza (read: The Fed’s Valuation Concerns Put These Growth ETFs in Focus).
The Fed has almost decided to leave the five-year long QE era this October with a final reduction of $15 billion in the monthly bond-buying program. Though the central bank committed to closely monitor the economic indicators before hiking interest rates, the possibility of a sooner-than-expected short-term rate hike is making the rounds.
In June, the Fed stated expectations of interest rates hitting 1.25% at the end of 2015, up from 1.0% projected in March. The key rate is expected to go up to nearly 2.5% at the end of 2016, higher than previously projected 2.25%.
Since the product is designed to give the opposite performance in response to the movement in Treasury bond yields on a collective basis (duration wise), investors might find it an intriguing option to play the rising rate worries and make some easy bucks without the need for shifting to stock markets.