Why These Leveraged Bond ETF Can Keep Packing On Assets

Fixed-income exchange traded funds saw record inflows last year and the way 2015 started for bond ETFs, it looked like it was going to be another stellar year. By mid-February, five of the top 10 asset-gathering ETFs to that point in 2015 were bond funds.

However, as concerns that the Federal Reserve will raise interest rates intensified, investors turned to funds that benefit from a rising dollar, including currency hedged ETFs. Now, no bond ETFs are currently found among the top 10 for 2015 inflows; to be fair, none of the 10 worst ETFs in terms of 2015 outflows are fixed income funds, either.

While investors have departed rate-sensitive longer-dated bond funds, such as the iShares 20+ Year Treasury Bond ETF TLT, which has shed over $1 billion this year, ETFs that are bearish on longer-dated Treasurys are raking in new assets. That theme may have more room to run.

Year-to-date, the ProShares UltraShort 20+ Year Treasury TBT and the Direxion Daily 20+ Year Treasury Bear 3X ETF TMV have added $142.1 million and $237 million in new assets.

Traders mulling positions in TBT or TMV can get some vision for the validity of those trades right now. In a note out Wednesday, Rareview Macro founder Neil Azous points out there is an implied probability of 59.2 percent that the Fed raises rates by the September 17 meeting. The probability of 25 basis-point increases after that jumps to almost 94 percent for the October 28 meeting and 136.3 percent for the December 16 meeting, according to Rareview Macro data.

TBT is designed to deliver two times the daily inverse performance of the Barclays U.S. 20+ Year Treasury Bond Index, TLT's underlying benchmark. TMV attempts to deliver triple the daily inverse performance of the NYSE 20 Year Plus Treasury Bond Index (AXTWEN). That is not TLT's index, but TMV's one-day moves, in either direction, often reflect three times TLT's move for a particular day.

“At the end of the day, we think that the fixed income markets’ pricing of probabilities of an interest rate hike through the end of the year are near perfectly priced for investors to take advantage of the optionality on their personal view,” said Azous.