Blogs & Comment

Bond yields at historic lows

Over the past 250 years, yields on 10-year U.S. Treasury bonds have rarely fallen below the present level of 2%. Time for a contrarian bet?

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If the history of investing has any messages, one might be that good gains are to be had from taking contrary positions when sentiment goes to an extreme. Of course, the gains are not completely without risk, and may require toughing out a period of losses until the market rebounds.

We now might just have one of those extreme situations to bet against. Renewed concerns over a slowdown in global growth have led yields on 10-year U.S. Treasuries down to 2% (as of Aug. 18). This is a level that has been breached only once or twice over the past 250 years, and then not by much and only briefly.

A bet on a rebound in bond yields can be placed through ETFs that go up in value when yields rise (or, from another angle, they track the inverse of bond prices). On U.S. markets, two are the ProShares Ultra-Short 20+ Treasury Fund (TBT) and ProShares Ultra-Short 7-10 Year Treasury Fund (PST). In Canada, one is the Claymore Inverse 10-Year Government Bond ETF (CIB).

These ETFs are not for everybody. They use derivatives and the U.S. versions are leveraged. It’s imperative to first understand how they work—for example how the “constant leverage trap” can erode value over the long run and render such ETFs suitable mostly for short-term trades.