Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Profit from Rising Interest Rates with ETFs

Interest-Rates / Exchange Traded Funds Jun 11, 2009 - 09:49 AM GMT

By: Money_and_Markets

Interest-Rates

Best Financial Markets Analysis ArticleRon Rowland  writes: Have you looked at interest rates lately? They’re soaring! Back on March 18, the 10-year Treasury bond yield dropped as low as 2.54 percent. This week it went above 3.90 — a huge move in less than three months. The same thing is happening in all but the very shortest maturities.


The reason isn’t hard to figure out: Between bank bailouts, stimulus packages, and old-fashioned waste, our government is spending money faster than the IRS can collect it.

10-year Treaury Yields are shooting higher

Massive borrowing by the federal government is driving up rates for everyone. Mortgage rates are pointing up, too, which won’t help the housing market recover any sooner.

Fortunately, a select group of ETFs and mutual funds are designed to turn this trend in your favor. These “inverse bond funds” actually gain in value as interest rates go up! Today I’ll tell you where to find these funds and how to use them most effectively.

The Bond Market See-Saw …

First, I want to make sure you understand something important: Bond yields and bond values always move in opposite directions. Think about it like a playground see-saw. If one side goes up, the other has to go down.

So when you read that bonds are up, it is another way of saying that bond yields are down. Likewise, if you hear that bond yields are rising, you know the value of bonds is falling.

Bond prices always fall as interest rates rise.
Bond prices always fall as interest rates rise.

Rising interest rates are bad news if you own bonds because they drive down the present value of your holdings. Yes, you should still get your scheduled payments of principal and interest, but you may have missed an opportunity to make even more.

This is not a new problem, of course. Traders have always speculated on bond prices, and institutions that lend and borrow money often use the futures market to hedge their interest-rate exposure. However, the average individual investor was left out in the cold.

That is until 1995, when the Rydex mutual fund family introduced the first inverse bond fund. Originally called Rydex Juno, the name was later changed to Rydex Inverse Government Long Bond Strategy (RYJUX). RYJUX was designed to deliver the inverse price performance of the current long-term Treasury bond.

RYJUX is still available today. But now you have other options, too.

  • ProFunds Rising Rates Opportunity (RRPIX) is very similar to RYJUX but adds a 1.25X leverage factor.
  • ProFunds Rising Rates Opportunity 10 (RTPIX) moves opposite from the ten-year Treasury bond, without leverage.
  • If you are really aggressive, the Direxion 10 Year Note Bear 2.5X (DXKSX) is an inverse ten-year bond fund with 2.5X leverage.

Treasury bonds aren’t the only interest-rate game in town, of course. If you watch the high-yield “junk” bond market and think it is due for a fall, you can pick from three unleveraged inverse mutual funds:

  • Direxion High-Yield Bear (PHBRX)
  • ProFunds Access Flex Bear High Yield (AFBIX)
  • Rydex Inverse High Yield Strategy (RYIHX)

What About ETFs?

All of the funds I’ve named above are traditional mutual funds. That means they have the disadvantages I told you about in my Money and Markets column, Why ETFs Beat Mutual Funds By A Mile. For instance, you can only trade once a day and the fees tend to be high.

The good news is that now you can get inverse exposure to Treasury bonds with ETFs, too! In fact, you have four different choices:

  • ProShares UltraShort 20+ Year Treasury (TBT)
  • ProShares UltraShort 7-10 Year Treasury (PST)
  • Direxion Daily 10-Year Treasury Bear 3X (TYO)
  • Direxion Daily 30-Year Treasury Bear 3X (TMV)

All of these ETFs are leveraged: The two ProShares offerings have 2X daily leverage, while the Direxion ETFs have 3X daily leverage.

Notice this term: “Daily leverage.” It’s very important to understand that leveraged ETFs (inverse or otherwise) re-set their leverage factor every day. That means you can’t depend on getting 2X or 3X performance for periods longer than one day. It might be more or it might be less, depending what the markets do.

If you're right about the direction of interest rates, the payoff from leveraged ETFs can be huge.
If you’re right about the direction of interest rates, the payoff from leveraged ETFs can be huge.

Actually, I regard all leveraged ETFs as trading vehicles, not long-term investments. They’re a really useful tool if you have a strong indication about the market’s short-term direction.

If you’re right, you may be able to amplify your gains. If you’re wrong, you can lose your shirt very quickly. So be sure to use these ETFs with caution — and if they start to move against you, get out pronto!

Another caution with all the inverse funds, leveraged or not: Don’t count on getting any interest payments while you own these funds.

In fact, since you are effectively in a short position, you’re paying a dividend to someone else! Not a pleasant thought. But the ultimate payoff can be huge if you’re right about the interest rate trend!

Best wishes,

Ron

This investment news is brought to you by Money and Markets . Money 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 http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in