The reason the yields are so high is because the bond's NAV has been dropping like a rock, propping up the yields.
CHeck this out.
inverse bond funds? A two year study...
Purpose of bonds in a portfolio is to do well when equities are not doing well - to anchor the portfolio. I don't think this is a good choice on the fixed side.
As a speculation I like the odds of the 30yr being 5% sometime in the next year or two. If you buy this fund you could make around 10-15% if it hits 5%. Seems like one of the best risk/reward mad money ideas out there to me. Can the 30yr go below 4%? I don't think so unless the meltdown occurs. 4.11% is the lowest it has been in over 50 years, that was recently. Almost everyone says the treasuries are overvalued now.
How do you figure this? As I understand it, this fund is short the "on the run" 30-year Treasury bond at a 1.25 leverage ratio. The duration of a 30-year Treasury with a 4.3% YTM is about 16. So if interest rates go from 4.3% to 5% over the next year, your capital return would be:
1.25 x 16 x 0.7% = 14%
But you (the fund) will have to pay the coupon, 4.3% (also levered) plus the fund charges a 1.5% annual expense ratio.
So the actual return to you would be
14% - 1.25 x 4.3% -1.5% = 7.1%
If it takes two years to reach 5%, your return would be
14% - 2 x 1.25 x 4.3% - 2 x 1.5% = 0.25%, or 0.125% per year
So, unless rates go to 5% pretty quickly, say in 6 months, I don't think this is a very good return for the risk taken.
I made some hot money doing the same thing with RYJUX in 2003. If I were to try this trade again, I wouldn't bother with the funds. Just buy puts on TLT.