JPMorgan prices two double short Treasury ETNs amid mounting bearish views on Treasuries

By Emma Trincal

New York, Oct. 6 - The anticipation of higher interest rates and the appetite for bearish bets on U.S. Treasuries have gained momentum, sources said, as JPMorgan Chase & Co. priced Monday two new exchange-traded notes that offer double short exposure to U.S. Treasury futures.

JPMorgan is jumping in with a trade that has long been popular in the equity market but had yet to catch on with bond investors, sources noted. Its two new ETNs come on the heels of similar launches initiated by Barclays Bank plc this summer.

JPMorgan priced $5 million of 0% double short US long bond Treasury futures ETNs due Sept. 30, 2025 linked to the NYSE US Long Bond Treasury Futures index, according to a 424B2 filing with the Securities and Exchange Commission.

JPMorgan also priced $5 million of 0% double short US 10 year Treasury futures ETNs due Sept. 30, 2025 tied to the NYSE US 10 Year Treasury Futures index.

For each product, Barclays has a shelf of $200 million, and the remainder will be sold from time to time.

Cascade of products

While exchange-traded funds, such as the $4.4 billion ProShares UltraShort 20+ Year Treasury, are mainstream instruments for "Treasury bears," there was a certain lack of products in the ETN market, sellsiders said.

Barclays filled the gap with the launch this summer of several iPath ETNs linked to Treasury futures with a $250 million shelf for each series.

Among those were the iPath U.S. Treasury two-year bear ETNs, the iPath U.S. Treasury 10-year bear ETNs and the iPath U.S. Treasury long bond bear ETNs.

Recently, Barclays priced several notes that also give investors a short exposure to Treasuries, such as its $2.35 million of 0% double short leverage securities due Sept. 30, 2013 linked to the Barclays Capital 30Y Treasury Futures index.

Even certificate of deposit issuers are jumping into the fray.

Harris NA said that it planned to price principal-protected certificates of deposit due Sept. 30, 2016 inversely linked to the Barclays 7-10 Year Treasury index, according to a term sheet.

The new bearish sentiment on U.S. government bonds remains a contrarian view though, sources noted.

For now, the Treasury rally has continued to prevail amid a flight to safety and unabated fear of deflation, with the two-year and five-year yields hitting record lows on Wednesday.

In addition, the Federal Reserve Board's recent hint about its intent to pursue quantitative easing through more Treasury purchases continues to fuel the rally.

Turning point

But sources said that the market is now at a turning point.

"I'm not surprised that new 'short-treasury-products' are now being sold. Even today with the two-year yield at a record low, people are starting to be skeptical about how much further rates can go down," said Ferenc Sanderson, chief operating officer at Cranwood Capital Management, a hedge fund firm that runs a Treasury arbitrage fund.

"I think that the market has already priced in a lot of things, including the notion that there may be more quantitative easing."

"Treasuries have had an incredible run, and it's hard to see it going much tighter," said Jakob Bronebakk, a structurer at Jubilee Financial Products. "I could see why people would now take a bearish view."

"The tide has turned," said Charlie O'Flaherty, principal at Third Reef Holdings, a buyside consulting firm and former head of retail structured products at Bank of Ireland. "I think a lot of people are beginning to think [that] maybe we should be prepared for higher interest rates."

When Goldman sneezes

A factor that may push more participants to reverse their bullish bets on Treasuries is the recent release of a research report by Goldman Sachs, in which its author, chief interest rate strategist Francesco Garzarelli, said that the Treasury rally has now run its course and that stocks are now the place to go for returns.

"People listen to Goldman Sachs. You'd be kind of a fool to ignore Goldman Sachs. But the mainstream press is also starting to see that sooner or later, interest rates have to go up," said O'Flaherty.

JPMorgan's 0% double short US long bond Treasury futures ETNs have been approved for listing on the NYSE Arca, Inc. under the symbol "DSTJ."

JPMorgan's 0% double short US 10 year Treasury futures ETNs have been approved for listing on the NYSE Arca under the symbol "DSXJ."

J.P. Morgan Securities LLC is the agent for both products.

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