ProShares TBT ETF: A classic macro trade for tough times

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If you agree with me that we have an unresolved inflation problem in the US economy, then an ETF like ProShares UltraShort 20+Year Treasury (NYSEARCA:TBT) might interest you. It tracks the ICE US Treasury 20+ Year Bond Index, investing in swaps and futures that track this index, to achieve -2x the daily return of this benchmark.

The modified duration of this bond index is 19.46%. This means that a 19.46% drop would precipitate a 1% increase in market interest rates. As the fund uses -2x leverage, this implies a 39.2% appreciation of the TBT. The fund has performed remarkably well of late, up more than 45% year-to-date (the 30-year-to-date Treasury is up more than 1 point year-to-date). the year), but it is still 12.5% ​​below its 52-week high of $29.56/share on June 14, 2022.

I rate this fund as a strong buy as it is an accessible vehicle to implement a bond short seller strategy in the midst of a global quantitative easing cycle. Unlike many ETFs, fund assets are difficult to track because few brokers advertise or even provide such products and data to their clients.

Why are bonds shorting today’s “classic” trade?

The strategy proposed by this ETF is “classic”, because modern finance and macroeconomic theory suggest:

  1. Interest and inflation are intentionally correlated
  2. Higher interest rates solve inflation problems
  3. Bond prices fall when interest rates rise

How much additional interest rate volatility might we expect in the current political economy, and how does this affect ETFs?

Since ETFs became a popular investment security, we have yet to witness the full extent of interest rate cycles, such as the highs of Paul Volcker’s presidency, when OPEC Risk Factors caused contractions in global oil supply, increasing inflation and triggering a massive reaction in interest rates. In some respects we are in uncharted territory, but international conflicts have not boded well for the inflation rate historically, in my view. the Second World War is another example. I believe that interest rates should offer real returns in order to transform savings into investments in the real economy.

Why is TBT ETF a good instrument for a portfolio manager to use?

Rising interest rates, and the cost of capital more generally, mean different things to different investors. I see at least these options as viable portfolio strategies that involve no exposure to the bond market:

  1. Go long on stock indices and focus on the long term
  2. Transfer cash assets indefinitely
  3. Selling stocks/ETFs short for cash collateral
  4. Buy some stocks and establish net neutrality by shorting others

In my opinion, the Treasury exposure is less risky at the moment because it is certain that we have a systematic problem. Inflation figures are harsh, with the CPI inflation rate to 8.6% year-on-year in May. The thing is, any lesser ROI marks a real loss – not the worst outcome for traders and investors who have some of their best performing stretches in stocks in their back sight, but I prefer consistency over starts and stops .

How can FOMC disclosure be useful/useless for an investor?

I am of the opinion that the Federal Reserve has not communicated the most likely future policy rates. There is a big academic discussion on the central bank and the credibility of their forward-looking statements. Perhaps the public shouldn’t always know the Fed’s best ideas or their full picture. The entity is legally mandated to represent the public interest in inflation and unemployment rates. Sometimes not sharing information can be to their regulatory advantage. The target inflation rate is often characterized as a low single digit and stable. Neither describes the May CPI, while May unemployment was quite weak.

What does the Treasury market tell us about future bank rates?

If relevant market participants were to actively take the Fed at its word, the yield curve would not be sloping upwards, but rather in line with the dot chart, in which you can see an inversion marking a pessimistic economic outlook.

Summary of Economic Projections

07/15/22 Dot Plot (Summary of Economic Projections)

Treasure YTM

01/07/2022 Treasury YTM (

Why TBT ETF in particular?

The index tracked by the fund, the ICE US Treasury 20+ Year Bond Index, is a good candidate for short selling. The maturity of the bonds in the index is long and the coupons are small. Bond duration, the sensitivity of a bond’s market price to market interest rates, increases with maturity and decreases with the coupon payment rate. This means that a slight increase in market rates can send this index lower than other bond indices. There are also no company or industry specific factors to consider as the government guarantees the securities in this index.

What is the valuation of TBT Fund?

TBT currently has $1.76 billion in assets under management. Since July 1, 2022, ProShares data shows that stocks are currently trading at a $0.07 discount to NAV/share, which means you are getting more assets than you are paying per share, before accounting for expenses, which are 90 bps. As another SA contributor pointed out, there may be a limited upside. Technically speaking, I don’t think it will be long before the fund is trading between $40/share and $45/share because it was stable at those levels in the pre-pandemic market, and the likelihood of rates lower to what they were at that time is very low because inflation remained stable around 2% between 2017 and 2019.

Data by YCharts

My highest price estimate uses this information and assumes a linear relationship between the stock price and the inflation rate. Extrapolating from a target inflation rate of 8.6%/2% yields a factor of 4.3, and 4.3 x current stock price equals a potential of $111.76 /action if the proportions were to be maintained. This fund was stable at $40/share at a much less worrying inflation rate of 2%! Assuming there is a 10% chance of reaching $111.76/share, a 10% chance of falling to 20% at a stop, a 40% chance of breaking above $50/share and a 40% chance of additional chances to break above $75/share, the expected value is around $63/share, representing an upside potential of around 59% over a two-year horizon. The 30-year Treasury yield peaked at around 15% in the 1980s, when inflation had a similar peak. I doubt a Treasury maturity would need to rise to 8% to balance interest and inflation, but it’s still possible for yields to double or even triple before they break even. Based on the modified duration of the index, this translates to a 75% or 100% increase in TBT.

CPI inflation rate

CPI inflation rate (

What are the risk statistics and potential risk management options?

TBT has a high short interest at 7% and about 70% more volatility than the median ETF. There are other ETFs with similar profiles to TBT, such as ProShares Short 20+ Year Treasury ETF (TBF). TBF is a low risk fund that only tracks -1x the ICE US Treasury 20+ Year Bond Index. Its short interest is only 0.20% and its volatility is 16% lower than the median ETF. With inverse instruments, also keep in mind that a liquidity event is a liquidity event and TBT prices could be affected even when market interest rates rise. This overlaps with the risk that the fund will not achieve its investment objective.


TBT is a strong buy, as changes in interest rates present opportunities worth taking advantage of. Given the current inflation and employment imbalance, as well as the Fed’s communication challenges, a short exposure to bonds is a promising portfolio strategy. Year-to-date, TBT holders have a pre-tax return of 45%. Seeking Alpha Quant analysis agrees with me, rating asset flows at A and momentum at A+. I think there is room for the trend to continue as CPI numbers still look too hot and rates too low given our historical backdrop.

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