2-10 yield gap: 2.8 30 yr high shy tuz ief PST

ProShares has launched two new ETFs that will give investors leveraged exposure to the U.S. Treasury market. The new funds are:

•The ProShares Ultra 20+ Year Treasury (NYSEArca: UBT)
•The ProShares Ultra 7-10 Year Treasury (NYSEArca: UST)
The new funds are designed to deliver 200 percent of the daily return of their respective indexes. As with all daily leverage or inverse ETFs, the long-term returns of these funds will vary from that 200 percent metric.

The new funds—the first positive leverage Treasury funds from ProShares—will compete with two leveraged Treasury ETFs from Direxion. The Direxion Daily 30-Year Treasury Bull 3x Shares (NYSEArca: TMF) and Direxion Daily 10-Year Treasury Bull 3x Shares (NYSEArca: TYD) are designed to deliver 300 percent of the daily return of their benchmark indexes. Those funds, however, have not been popular with investors: They have a combined $20 million in assets.

Investors are shying away from long Treasury bets right now, on concerns that rising rates could lead to capital losses in the Treasury markets.

The new ETFs will serve as “long counterparts" to popular inverse fixed-income ETFs from ProShares—the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) and the ProShares UltraShort 7-10 Year Treasury (NYSEArca: PST). Both TBT and PST are bearish takes on the bond market, providing -200 percent the daily returns of their underlying indexes. TBT has become incredibly popular, attracting some $4.6 billion of assets in less than two years since inception.



After engaging in large spending sprees, countries have found themselves in deeper levels of debt. The end result is that many bond and bond-related ETF investors wait on the fate of monetary policies.

Any doubt over a country’s sovereign line of credit will likely put upward pressure on long-term bond yields in high-deficit countries, reports Richard Barley for The Wall Street Journal. The yield curve is the relationship between the interest rate and the time to maturity of the debt for a given borrower in a given currency, as stated in Wikipedia.

So far, the gap between the U.S. two- and 10-year bonds is still hovering around 2.8% – a 30-year high.

Countries like the United Kingdom and the United States, whose budget deficits are running in the double-digits as a percentage of GDP, are being threatened with losing their triple-A credit ratings. Additionally, the eurozone may also need to consider deficit reduction or face increased funding costs.

Policy makers now have to decide if higher interest rates will impede growth. However, if they find out that increases in long-term interest rates reflected the government’s willingness to keep higher inflation to ease debt burdens then they would need to raise rates.

The markets are still split on the world’s timing of monetary tightening. Some believe rates will increase this year while others argue that central banks will hold off till 2011.

iShares Lehman 7-10 Year Treasury Bond Fund ETF (NYSEArca: IEF)



iShares Lehman 1-3 Year Treasury Bond Fund ETF (SHY)



PIMCO 1-3 Year U.S. Treasury Index (NYSEArca: TUZ)



Max Chen contributed to this article.