TBT ETF Gains 16% Yearly Despite Flat Week After Fed Hike
ProShares UltraShort 20+ Year Treasury gained 16% over a year but nearly stalled after the September rate cut.
Key points
- TBT gained 16% over one year but only 0.08% in the week after the Fed's September hike.
- Barclays predicts a December rate hike, while TD Securities expects moves in October and January.
- Daily reset mechanics cause compounding drag, eroding returns during oscillating bond price movements.
ProShares UltraShort 20+ Year Treasury (TBT) delivered a 16% gain over the past year. This performance occurred despite the fund rising only 0.08% in the week following the Federal Reserve's September 17 rate hike.
The discrepancy stems from the fund's daily reset mechanism. This structure creates compounding drag when bond prices oscillate, eroding gains even if the directional bet on higher rates proves correct.
Fed Expectations Drive Yield Movements
The Federal Open Market Committee raised the policy rate upper bound to 4% on September 17. Analysts at Barclays forecast a second hike in December, while TD Securities expects moves in October and January.
Long-end yields responded sharply to these expectations. The 10-year Treasury yield reached 5% on September 18, marking its highest level in the trailing year compared to a 4% low in February.
Duration Amplifies Bond Price Swings
TBT offers two times the daily inverse return of long-dated Treasuries. These bonds carry the highest duration, meaning small yield shifts cause larger price moves than shorter-term debt.
The fund holds approximately 72% in cash equivalents, with the rest in Treasury futures. Net assets stand near $333 million, positioning it as a mainstream short instrument.
Daily Resets Create Compounding Drag
TBT rebalances its inverse exposure every trading day, creating a mathematical penalty during choppy markets. A day up 2% followed by a day down 2% leaves the fund lower than its starting point.
The 10-year minus 2-year spread compressed from 0.50% to 0.20% on September 21. This volatility environment maximizes the negative impact of the daily reset structure on investor returns.
