Lyxor introduces first US Treasury steepener ETF in Europe

Aug 1st, 2019 | By | Category: Fixed Income

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Lyxor has launched a new ETF – the first of its kind in Europe – which allows investors to profit from a steepening of the US Treasury yield curve.

Lyxor introduces first Treasury steepener ETF in Europe

Adam Laird, Head of ETF Strategy, Northern Europe, at Lyxor ETF

The Lyxor US Curve Steepening 2-10 UCITS ETF (STPU LN) has listed on the London Stock Exchange and comes with an expense ratio of 0.40%.

Adam Laird, Head of ETF Strategy, Northern Europe at Lyxor, commented, “Eyes are on central banks at the moment – who have the ability to make or break a fixed income portfolio. We’ve heard from a number of clients that the US curve is very flat, but that this can’t last forever.

“Our fund is a way for investors to play this change – we are always looking for innovative ways to protect and profit from changes in the bond market. Expect more on this theme from us in the coming weeks and months.”

The fund is linked to the Solactive USD Daily (x7) Steepener 2-10 Index which consists of two components: a long position in two-year US Treasury bond futures and a short position in ten-year US Treasury ultra bond futures. The futures contracts are rolled on a quarterly basis.

The strategy uses a multiplier to both the short and long legs, resulting in a leveraged long/short position. This means that a one basis point increase in the steepness of the curve (the difference between ten-year and two-year yields) corresponds to an increase of approximately seven basis points for the fund.

The fund is likely to find favour with institutional and professional investors who will appreciate the ease of a one-ticket solution compared to the complexities of constructing the strategy from scratch using individual futures contracts.

This seems to be borne out in the numbers, with the fund coming to market with an impressive $100m at inception – money understood to have come from asset managers and private banks. Discretionary fund managers see merit in the fund too.

Irene Bauer, CIO of Twenty20 Investments, commented, “The hot topic of the summer of 2019 has been the flattening of the US yield curve, so it is timely for Lyxor to come out with an ETF that allows one to play on a steepening of the curve. If the Federal Reserve continues with their rate-cutting policy this year, as the market somewhat expects, this is the ETF to be invested in.”

With two-year and ten-year yields of 1.89% and 2.02%, respectively, this key portion of the yield curve is at its flattest for over a decade. History says this kind of term structure doesn’t last.

The fund’s debut certainly seems well-timed, coinciding with yesterday’s rate cut from the Federal Reserve – the first time in ten years – in a bid to drive down near-term rates and correct the yield curve’s inversion.

But while the yield curve is flat, not all analysts believe the curve will necessarily steepen in the near future.

Lee Ferridge, Head of Multi-Asset Strategy, the Americas at State Street Global Markets, said, “The Fed is clearly concerned by the recent data slowdown in parts of the economy and continued soft inflation prints. While this move was characterized as more of an insurance cut, the FOMC may now be in wait and see mode to see if its fears over the trade war and global slowdown come to fruition. This less dovish message is likely to see short rates rise and the yield curve to flatten.”

It seems Lyxor has got this covered. Prospectus documents show that the issuer is planning to introduce a second ETF that stands to benefit from a flattening of the yield curve. There are also plans to launch two funds targeting a steepening or flattening of German Bund yields.

These launches, which will provide investors with a useful toolkit with which to tactically position portfolios ahead of future changes to the respective yield curves, is a further manifestation of the accelerating innovation within fixed income ETFs.

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