TBT: No Compelling Evidence Of A Bond Bottom; Reiterate Buy

The Treasury term premium is back above zero. This is often a tough concept to grasp for casual investors. The term premium in yields is defined as the a bond’s yield minus the expected average short rates (over the life of the bond), and the term premium in forward rates is defined as forward rate minus the expected short rate (for the same horizon as the forward rate contract), so says the Federal Reserve. In our context, it is simply more evidence that investors demand elevated compensation, in the form of higher yields, to own long-dated Treasuries.

I reiterate my buy rating on the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT), but I have a short time horizon on this fund, partly due to its leverage, but also based on momentum characteristics in the fixed-income market today.

Term Premium Increase: Perceived Value in Long Bonds Dropping, More Yield Demanded

For background, TBT seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. With a leveraged short ETF, it’s key to understand the mathematical impact of volatility on returns when you hold something like TBT beyond a few days – there is an added risk of negative compounding returns (see disclosures at the conclusion of this article). While a straight-line move higher in the 30-year yield (a selloff in the long bond) would result in strong returns to TBT holders, volatile price action in TLT would result in a slow decay of TBT’s NAV and market price.

TBT is a popular ETF for trading, but it does not have a high amount of assets under management – just $632 million. The fund yields 2.81% on a trailing 12-month basis and carries a high annual expense ratio of 0.89% as of October 13, 2023. Liquidity is strong with the product given average daily volume of more than 1.6 million shares. Price momentum has been strong in the last six months, though the fund has pulled back significantly off its October high. I assert, though, that yields may see another burst to the upside, which would be beneficial for TBT since it is leveraged to the short side on long-dated Treasuries.

Take a look at the US 2-year Treasury, for instance. It spiked to 5.25% just a few days ago. This part of the yield curve sports an inflation-adjusted rate easily north of 2% as the bond bears continue to assert their presence.

When Will Investors Step Up Their Treasury Buys? 20-Year Spikes to 5.25% In October.

For the 30-year, the current consolidation of Q2 and Q3 gains makes sense. Moreover, there were inklings of a flight to quality at times last week as geopolitical jitters continued. A key risk for TBT holders is that fears truly shift from inflation to war worries, leading to investors selling stocks and buying bonds.

What could also go wrong for short Treasury plays is a continued ebbing of inflation, but I must reiterate that my long take on TBT is near-term oriented. I expect inflation to indeed retreat over the coming quarters, with the Fed likely done with its rate-hiking cycle.

30-Year Yield’s Rapid Rise Pauses In October, A Corrective Move So Far

My long-TBT thesis is largely technical in nature. There are plenty of fundamental reasons why yields may continue higher. Who’s left to purchase government bonds now that both Japan and China have become much less willing to own Treasury securities? Also, the Fed continues to conduct quantitative tightening as it reduces its balance sheet. Pension funds and investors nearing retirement are the probable buyers, but those groups are not as large as sovereign governments.

Japan & China Reducing Relative Treasury Stakes

Notice in the chart below that there’s clear momentum with the bond bears. Yields across the curve have been moving up, and the latest burst comes not from short-term rates, but from the belly of the curve and later.

Treasury Yields Rising Across the Curve

Making the market all the more uncertain is ongoing elevated interest rate volatility. I keep tabs on the ICE BofA MOVE Index (MOVE). North of 120 today, it is not far from 52-week highs – yet another sign of bond market uneasiness.

Treasury Rate Volatility Continues to Run Hot

The Technical Take

Let’s home in on TLT – the 20+ year Treasury ETF (1x long). This is roughly what TBT is based on, so I see it as the most useful when performing technical analysis due to its high liquidity and volume. I see resistance at the late 2022 low near $92 – that is also the August low and key breakdown level from late in Q3. I concede that the $84 nadir notched earlier this month looks like a decent bottom as it came along with an extremely high-volume profile.

But take a look at the RSI momentum indicator at the top of the chart – it is clearly in a downtrend. We’ve yet to see definitive signs of a momentum reversal, and those often take place before price inflections. Additionally, the long-term 200-day moving average continues to be negatively sloped, a sign that the bears remain in control. Finally, there is a high amount of volume by price in the $95 to $110 area which will make any rally attempts tough slogging for the bulls.

Overall, TLT appears bearish, something I wrote about earlier this month. For now, I just do not see enough evidence to warrant a different stance with such a short-term vehicle like TBT.

TLT: Bearish Downtrend and Momentum Persist, Leading To My Positive View of TBT

The Bottom Line

I have a buy rating on TBT given the trend of higher yields and steep selling on the long end of the Treasury curve.

Additional disclosures:

1) The Lowdown on Leveraged and Inverse Exchange-Traded Products (FINRA)

2) Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors (SEC)

3) FINRA’s Reminder on sales practices for Leveraged and Inverse ETFs (FINRA)