Institutional Investor(s) Bet Big On Leveraged Treasury ETF

Six months ago to the day, the Dow Industrials was sitting near multi-year highs. At the same time, one or more institutional investors piled into leveraged intermediate treasuries. The exchange-traded fund? ProShares Ultra 7-10 Year Treasury (UST). The commitment? $40 million on 25x normal trading volume.

Back then, it seemed like a long shot to expect significant gains in a leveraged treasury play. With the 10-year yielding 2%, one needed to see the 10-year yield down around 1.5% in order to sell for a 10% price gain on a 2x (200%) leveraged fund.

As if on cue, investors watched May-June gloom erode nearly all of the stock market’s year-to-date progress. Equally worthy of note, intermediate treasuries served as a popular safe haven, as the 10-year yield witnessed lows as remarkable as 1.4%.

Fast forward from May 1 to November 1.

The 10-year yield is back around 1.7%. And an institutional investor or several investors purchased $52 million of ProShares Ultra 7-10 Year Treasury (UST) via block trading on 28x normal volume. The activity is virtually identical to the one that occurred six months ago.

I recognize the importance of garnering income at the middle of the curve. What’s more, I own a healthy amount of iShares Intermediate Corporate Credit (CIU). That said, I do not currently see enough value in treasury bond ownership nor am I inclined to seek price gains that correspond to twice (200%) the daily performance of the Barclays Capital U.S. 7-10 Year Treasury Index.

At present, stocks are pricing in plenty of quantitative easing worldwide, debt crisis containment in the euro-zone and a relatively painless bipartisan compromise on post-election fiscal negotiations. In contrast, the purchaser(s) of ProShares Ultra 7-10 Year Treasury (UST) must feel that a debt crisis flare-up is possible and that a political log-jam in the U.S. is more probable than a speedy resolution.

I certainly don’t subscribe to the idea that anyone can predict the future. Still, the fact that this bet worked nicely for an institutional investor on the last go-around is worthy of note.

UST November 1

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Leave a Reply