Ossiam launches US Treasury steepener ETF

Aug 19th, 2019 | By | Category: Fixed Income

Paris-based ETF issuer Ossiam has launched a new fund in Europe which allows investors to profit from a steepening of the US Treasury yield curve.

Ossiam launches US Treasury steepener ETF

Ossiam has launched the Ossiam US Steepener UCITS ETF on Deutsche Börse Xetra. (file image)

The Ossiam US Steepener UCITS ETF has listed on Deutsche Börse Xetra where it trades in US dollars under the ticker USTP GR.

The fund tracks the Solactive US Treasury Yield Curve Steepener 2-5 vs 10-30 Index through synthetic (or swap-based) replication.

The index consists of a long position in two-year and five-year US Treasury bond futures and a short position in ten-year and thirty-year US Treasury bond futures.

It is constructed using multipliers to both the short and long legs such that a one-basis-point increase in the steepness of the yield curve is expected to translate to approximately a ten-basis-point gain for the index. Similarly, a one-basis-point decrease in the steepness of the yield curve is expected to lead to a performance loss of roughly ten basis points.

The methodology also seeks duration neutrality such that parallel shifts in the yield curve will not impact index performance. Index reconstitution occurs on a quarterly basis.

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

Commenting on the launch, Bruno Poulin, CEO of Ossiam, said, “We have launched the Ossiam US Steepener ETF at a time when the US Treasury yield curve is as flat as it has been since 2007 and many market participants expect a steepening. With this latest addition to the product range, Ossiam offers investors uncomplicated access to a proven strategy that allows institutional investors to position their portfolios for changes in the term structure of interest rates.”

Timo Pfeiffer, Head of Research at Solactive, added, “This is a timely launch of this ETF, considering the yield curve is at its flattest for over a decade. Depending on how the Fed’s interest rate decision plays out compared to market expectations, optimistic investors could generate returns for their fixed income portfolio and place strategic positions. The ETF provides investors with another tool to play the yield curve and position themselves for a steepening curve play.”

With yields of 1.48% and 1.44% for two- and three-year Treasury bonds respectively and yields of 1.55% and 2.01% for ten- and 30-year Treasury bonds respectively, the US government yield curve is indeed uncommonly flat. The fund is a convenient vehicle for investors who think this kind of interest rate profile won’t last.

The ETF comes with an expense ratio of 0.30% and is ten basis points cheaper than the recently launched Lyxor US Curve Steepening 2-10 UCITS ETF (STPU LN) which costs 0.40%.

The Lyxor fund, which became the first US Treasury steepener ETF in Europe when it launched earlier this month, tracks the Solactive USD Daily (x7) Steepener 2-10 Index. The index also uses leveraged long and short positions but aims to provide a performance multiplier of seven when the yield curve changes its steepness by one basis point.

Whilst the Ossiam and Lyxor funds have the same broad objective, they differ in the way they are constructed. The Lyxor fund captures returns associated with a steepening in the short- to intermediate-end of the yield curve while the Ossiam fund captures the effect of a steepening occurring between the short- and long-end of the yield curve.

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