The proshares ultrashort treasury etf (symbol TBT) is gaining a lot of attention lately.  The theory is that as the government recklessly runs up larger and larger deficits, the borrowing costs to the government will go up, in the form of higher interest rates.  Bond prices behave inversely to interest rates, so as interest rates go up, the bond prices should go down.  When treasury bond prices go down, the investment vehicle that has short exposure to the treasuries will go up.


Read the excerpt from a recent Bloomberg article below:

Yields on 10-year notes climbed above 3.4 percent for the first time since November as investors also raised concern about the possibility that record supply of Treasuries to pay for a mounting budget deficit may jeopardize the U.S.’s AAA credit rating.

And here is a chart of the TBT ultrashort treasury profund.

tbt-ultrashort-treasury

But before you start listening to the 1000 idiots on CNBC, you should consider this before racing to buy into the TBT:

  • The government has already declared it won’t be constrained by higher interest rates, and will simply sell the bonds that it can sell at reasonable rates, and just wildly print money out of thin air for bonds that it can not sell, which artificially manipulates the long term treasury rates.
  • The Proshares TBT fund is a giant black hole of complex derivatives that few people understand
  • The Proshares TBT has significant risks

From the Proshares TBT prospectus:

Proshares Ultrashort 20+ Year is subject to the following risks – Ttreasury Aggressive Investment Technique, Risk Correlation Risk, Counterparty Risk, Credit Risk, Debt instrument Risk, Interest Rate Risk, Inverse Correlation Risk, Investment Company and Exchange Traded Fund Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-Diversification Risk, Portfolio Turnover Risk, Short Sale Risk and Valuation Time Risk.  The Fund may be subject to risks in addition to those identified as principal risks.

To breakdown just two of these risks in layman’s terms:

  • Risk correlation risk – This essentially means that despite what the objective is (inverse performance of the treasuries), there are no guarantees to matching that objective, or even coming close to that objective.  It’s quite possible that treasury yields could go up at the same time that the ultrashort treasuries (TBT) could go down.
  • Counterparty risk – The instrument is a complex mix of derivatives that few people understand.  Derivative contracts have two parties and the other party will not be disclosed.  Further, the other party, whoever it is, may go bankrupt (Hint:  Lehman Brothers, Bear Stearns) and render those complex derivatives that make up TBT entirely worthless.

Bottom Line: If you are interested in TBT, you may want to consider it for a quick trade only.  Holding on to this one for the long haul may yield unintended and non desirable consequences!