Interest rate speculation: A boon for TAPR ETF

Speculation over interest rates, in particular the timing of a hike in short-term rates, is rife in the U.S. this year. Before every Fed policy meet, investors and market participants are abuzz over this issue.

In any case, U.S. Treasury bonds, especially the long-term ones, have ruled since the start of the year on an elevated risk quotient in the global investing world, resulting in a flight to safety. Yields on 10-year Treasury notes are going downhill, propelling bond prices higher. Long-term U.S. treasury ETF 20+ Year Treasury Bond ETF (TLT) has gained about 16% so far this year.

On the other hand, short-term bond ETFs were hard hit during this phase as the Fed will likely leave the QE era in October and in all probability change its prolonged synthetically low-rate environment next year. Though the Fed has repeatedly affirmed that the rates will remain low for a ‘considerable time’, investors expect to see the first rate rise in mid 2015.

Moreover, the Fed notified that though it will retain a low-rate environment for as long as the economy needs, the hike will be steeper when the procedure actually takes place. The rise in the Fed officials’ median estimate for the key interest rate at the end of 2015 to 1.375% from 1.125% projected in June hints at this.

In such a situation, the U.S. market will likely see a slump in the bond bull market next year and investors can make the most of it by shorting treasuries. Though the inverse U.S. Treasury space has just a handful of products, a new ETF namely Barclays Inverse US Treasury Aggregate ETN (TAPR) has seen stupendous success since it hit the market this July.

TAPR in Focus

The note provides investors a unique strategy to hedge against or benefit from rising U.S. dollar interest rates by tracking the Barclays Inverse US Treasury Futures Aggregate Index. This benchmark employs a strategy, which follows the sum of the returns of the periodically rebalanced 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.

If the price of each Treasury futures contract increases or decreases by 1% of its face value, the value of index would decrease or increase by 5% over the same period.

The ETN has about $24.2 million in net assets. It charges 43 bps in annual fees and trades in light volume of about 2,000 shares per day on average, ensuring additional cost in the form of a wide bid/ask spread.

Performance of TAPR

The note has gained about 5.8% in last one month thanks to the heightened speculation of rate rise.  However, with the Fed refraining from announcing the timing of the first hike in its September meet, concerns over rate rise has eased to some extent. This has caused the ETN to shed about 6.4% in the last two weeks (as of September 29).

Bottom Line

TAPR is the sole product in the ETF space offering all five tenures on the US Treasury futures curve providing an interesting hedging strategy between short-term, intermediate-term and the long-term bonds. Investors should note that short-term bonds are less interest rate sensitive and low yield in nature while long-term bonds behave in a different fashion. Thus, such a wide coverage across the yield curve has made TAPR a winner since inception.

Otherwise, there are some products available in the inverse treasury ETF space namely iPath US Treasury 10-year Bear ETN (DTYS), US Treasury Long Bond Bear ETN (DLBS) focusing on the Barclays Capital Long Bond Futures Targeted Exposure Index, US Treasury 2-Year Bear ETN (DTUS) and US Treasury 5-year Bear ETN (DFVS) having exposure to the Barclays Capital 5Y US Treasury Futures Targeted Exposure Index.

Investors should note that no other product has returned as impressively as TAPR in the last one month, suggesting it could be a great way to play the trend.
 
ISHARS-20+YTB (TLT): ETF Research Reports
 
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