Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Profit From Flattening Yield Curve With This ETF

Published 03/28/2014, 05:45 AM
Updated 07/09/2023, 06:31 AM

Though the fixed income world, in particular Treasury bonds, gathered some steam starting this year, these are faltering again thanks to the Fed latest comments. The Fed, which has committed to keep short-term interest rates at a near zero level, signaled a rate hike sooner than expected. 
 
This is especially true as Janet Yellen withdrew the unemployment rate threshold of 6.5% before raising rates. Now, the Fed views increase in short-term rates six months after the current monthly bond purchases program ends, which is expected this fall. As such, short-term interest rates are expected to move up by the middle of 2015.
 
This concern has led to a broad sell-off in the Treasury bond market, resulting in spiking yields. Unlike last year, short-term Treasury bonds are the worst hit this time while intermediate and long-term Treasury bonds are trending lower.
 
This is because the short end of the yield curve is rising faster than the long end, and the spread between both the two yields is narrowing. The spread between the 2-year and 30-year yields tightened to the lowest since July, indicating that the yield curve is flattening.
 
This trend is likely to continue in the coming months, suggesting investors might want to avoid riding the yield curve or take an inverse position. This could be easily done through the only option in the broad bond ETF space – iPath US Treasury Flattener ETN (FLAT.K).
 
FLAT in Focus
 
This product provides inverse (or opposite) exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts.
 
The index takes a weighted long position in 2-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. It generally rises when the yield curve steepens and falls when it is flattening. As such, investors could make smart profits from the flattening of the yield curve through the ETN thanks to its inverse relation with the index.
 
However, investors should note that FLAT is expensive, charging 0.75% in fees and expenses, and has higher trading cost thanks to its illiquid nature. The product is unpopular too as it has amassed just $4.7 million in its asset base.
 
The note gained nearly 3.5% over the trailing three months and has clearly outpaced the broad U.S. market fund (SPY - ETF report) and the ultra-popular short-term bond (ARCA:BSV) by a wide margin. This trend is likely to continue given sooner-than-expected interest rate hikes as well as positive technical signals.
 
Technical Look
 
Although the note hasn’t broken out of its near-term range, its short-term moving averages (9-Day and 50-Day SMA) is now comfortably above the longer-term 200-Day SMA, suggesting continued bullishness for this ETN.
 
Meanwhile, the product’s RSI is below 60, suggesting that the note isn’t too overbought, and that it still has some more room to run. This is further confirmed by an upswing in the Parabolic SAR, although this figure should definitely be monitored closely.
 
FLAT
  
Bottom Line
 
Given that the increase in interest rates could come sometime in the middle of 2015, the Flattener ETN makes for a compelling choice for investors seeking to take advantage of the flattening yield curve.

Original post

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.