Bond ETFs: Ultra-Short Treasury ETF Is Suggesting Greater Risk-Taking

What does one make of an investment that is down 40% in 12 weeks, yet has unquenchable investor interest? The ETF in question averaged less than 500,000 shares traded in September 08, but is currently averaging about 2,000,000 in December 08?

Say "Hello" to the ProShares Ultra-Short 20+ Treasury Fund (TBT). This exchange-traded fund seeks  twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index.

Since longer-term treasury bonds have gained more than 20% over the last 3 months of the credit crisis, TBT has been cremated. Even 3 months ago, pundits surmised that the 30-year U.S treasury bond yielding 4.5% was undesirable... yet the bonds rose precipitously as the yields dropped from 4.5% to 4% to 3.5% to 3% to 2.5%.

Yields could drop lower... sure. And that would mean more losses for those investing in ProShares Ultra-Short 20+ Treasury Fund (TBT).

However, I think the frenzied safe haven buying of treasuries has come to an end. And here's why:

1. A-grade corporate debt demand has jumped dramatically. At what is often talked about as the "October 10 lows," investors didn't just leave the stock market; they also left company debt. In fact, they left A-grade Wal-Mart and Procter&Gamble-like debt. At that time, the iShares Investment Grade Bond Fund (LQD) traded at 80. Ten weeks later, LQD is trading 20% higher.

Of course, it isn't just the 20% capital appreciation in corporate debt that's impressive here. It's the fact that it is trading near the 100 price point that it historically traded at before the Lehman bankruptcy and Fannie/Freddie failure. What's more, the 5% annual yield paid monthly is going to keep pushing LQD up to the 110 level, as any yield above 4% will be seen as attractive. And that money will likely come out of treasuries. (Read more on Investment grade bond ETFs right here.)

2. Stock market volatility is declining. I honestly never expected to be declaring a CBOE Volatility Index (VIX) reading of 43 as a "good thing." It's like a summertime in Phoenix, Arizona... "It's 117 degrees and cooling down this week."

In the past, any VIX spike above 30 was a sign of irrational fear. For the last 90 consecutive days, however, the VIX has traded between 30 and 89, breaking record highs and ushering in a new era of heightened "scared-to-death-ness." All that said, the VIX is well below its 50-day moving average. What's more, intra-day price swings have declined substantially each month since October. In other words, treasury overdrive may be wearing a bit thin.

3. Everything and the kitchen sink. The bear market itself may be getting long in the tooth. But stocks still have serious detractors. The possibility of a multi-year recession, as opposed to a "hoped-for" late 2009 recovery, may keep stocks in relative check.

But the central banks/governments around the entire world are fighting the credit crisis with everything and the kitchen sink. Some of the efforts will take hold, encouraging a bit of risk taking activity. That means money will come out of treasuries and go somewhere... whether it's A-grade debt, foreign bonds, emerging bonds, preferred debt, convertible debt. In other words, the money does not have to flow into stocks for the ProShares Ultra-Short 20+ Treasury Fund (TBT) to thrive; it just has to leave U.S. treasuries... and I believe that it will.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[K Miller]

What is your current opinion about TBT as of May 13, 2009?
Stock Market looks toppy to me with a very strong resistance at 9000. More unemployment and less than favorable quarterly results from retail might mean a retracement of the Dow/Nasdaq.
Hence, another 'temporary' (?) flood of money back into Bonds?
2. What is your long term view(2-5 years) of 30 year treasury bond? Is TBT becoming a buy and hold ETF?

Thanks!

[Greg Feirman]

Yeah volume is really picking up in TBT. Starting to look like a bottom.....

[Scott]

This is great advice - I was wondering how I could take advantage of the overbought situation in Tresuries. The primary question is when to sell - should we use yield as a particular metric? And what is a fair yield? 3%?

[Maurice]

Gary,

Working on Christmas Eve? Thanks for this tidbit, your information is always useful, unlike a lot of hyperbole we get in the financial media. I've been a little leary of leveraged ETFs after reading one of your posts some time ago, so I think I'll add the TBT as a means of monitoring market activity. Thanks for taking the time to answer my e-mails.

Merry Christmas!