iPath jumps into the high-stakes domain of Treasurys, the yield curve and interest-rate risk.
iPath, a unit of Barclays PLC, the London-based global financial giant, today launched eight exchange-traded notes linked to U.S. Treasury futures indexes. The new ETNs represent Barclays’ first foray into the market for fixed-income exchange-traded products.
“The new ETNs allow investors to take a view on whether the yield curve will steepen or flatten or if specific yields might increase or decrease,” Philippe El-Asmar, a Barclays executive, said in a press release.
iPath pioneered the U.S. ETN market in 2006 when it launched a pair of commodities-linked ETNs, the Dow Jones AIG Commodity Total Return Index (NYSEArca: DJP) and the Standard & Poor’s GSCI Total Return Index (NYSEArca: GSP). Investors currently have some $10 billion invested in U.S.-traded ETNs.
With 2010 inflows into fixed-income exchange-traded products surging, Barclays’ launch appears to be well-timed. According to research from the Morgan Stanley Smith Barney economics team, second-quarter net inflows into fixed-income exchange-traded products totaled $20 billion, dwarfing inflows into any other asset class.
iPath’s new crop of ETNs include six bull-and-bear pairs:
- iPath US Treasury 10-year Bull ETN (NYSEArca: DTYL)
- iPath US Treasury 10-year Bear ETN (NYSEArca: DTYL)
- iPath US Treasury 2-year Bull ETN (NYSEArca: DTUL)
- iPath US Treasury 2-year Bear ETN (NYSEArca: DTUS)
- iPath US Treasury Long Bond Bull ETN (NYSEArca: DLBL)
- iPath US Treasury Long Bond Bear ETN (NYSEArca: DLBS)
In addition, iPath launched a pair of ETNs designed to give investors the ability to take a view on whether the yield curve will steepen or flatten:
- iPath US Treasury Steepener (NYSEArca: STPP)
- iPath US Treasury Flattener (NYSEArca: FLAT)
The New ‘Steepener’ and ‘Flattener’ ETNs
Barclays executive Tim Edwards said the iPath US Treasury Flattener (NYSEArca: FLAT) effectively takes long positions in two-year Treasury futures contracts while simultaneously taking short positions in 10-year Treasury futures.
“The new steepener and flattener ETNs are linked to positions in U.S. Treasury futures, weighted by duration,” said Edwards in the telephone interview.
Investors use the yield curve as a bellwether for overall U.S. economic growth. For instance, an inverted yield curve—which occurs when short-term interest rates are higher than those on longer-term debt—may be a sign of a looming recession.
Unique ETN Risks
Unlike their ETF cousins, ETNs are senior unsecured debt obligations that track an underlying index perfectly, minus costs. The catch is that they are subject to the credit risk of the issuer. If Barclays were ever to face bankruptcy, then its ETN investors would wind up in line behind the bank’s secured creditors.
By contrast, ETFs represent the investor’s ownership interest in an underlying index of securities, commodities or currencies, and do have tracking error.
While ETNs do carry credit risk, many investors prefer them because the Internal Revenue Service has indicated it would be likely to tax any increase in ETN value using the low long-term capital gains rate. In its prospectus materials for the new funds, however, Barclays says that the IRS could revisit its treatment of ETNs in the future.