Barclays' new iPath ETNs on Treasury futures introduce novel ETN plays on yield curve shape

By Emma Trincal

New York, Aug. 10 - Barclays Bank plc's launch of eight new exchange-traded notes linked to U.S. Treasury futures indexes are Barclay's first iPath products to give investors access to fixed-income strategies, with six of the eight strategies being offered under an ETN format for the first time, executives at Barclays Capital's investor solutions group told Prospect News.

The eight iPath ETNs linked to Treasuries futures indexes began trading on Tuesday, according to an FWP filing with the Securities and Exchange Commission.

Barclays priced $250 million of each on inception, Monday, with a portion sold on that day and the remainder to be sold from time to time at varying prices.

Those products and their tickers on the NYSE Arca are as follows:

• iPath U.S. Treasury Steepener ETN (STPP);

• iPath U.S. Treasury Flattener ETN (FLAT);

• iPath U.S. Treasury Two-year Bull ETN (DTUL);

• iPath U.S. Treasury Two-year Bear ETN (DTUS);

• iPath U.S. Treasury 10-year Bull ETN (DTYL);

• iPath U.S. Treasury 10-year Bear ETN (DTYS);

• iPath U.S. Treasury Long Bond Bull ETN (DLBL); and

• iPath U.S. Treasury Long Bond Bear ETN (DLBS).

Two milestones

The "steepener" and the "flattener" are the first ETNs to allow investors to express views on the shape of the yield curve, Tim Edwards, vice president of investor solutions at Barclays Capital, told Prospect News.

The six other ETNs enable investors to get exposure to fixed-income strategies via long or short positions on different U.S. Treasury maturities from the two-year term to maturities longer than 15 years, according to a 424B2 filing with the SEC.

"This launch underscores our commitment to expanding the iPath ETN platform in the U.S. and providing investors with innovative investment solutions across all asset classes," Philippe El-Asmar, managing director and head of investor solutions at Barclays Capital, said in a company press release.

Since it launched in 2006, the ETN market in the United States has reached a size of more than $10 billion of assets under management, El-Asmar said in the release.

Sources said that the ETNs that give investors ways to generate returns from a "steepening" or a "flattening" of the U.S. Treasury yield curve are the most unique of the new iPath series.

"These [two] are the first exchange-traded products that offer exposure to a yield curve strategy," said Edwards. "A strategy based on a steeper or flatter yield curve has never been offered by any exchange-traded note or exchange-traded fund before."

Those two ETNs are based on the Barclays Capital U.S. Treasury 2Y/10Y Yield Curve index, which seeks to capture returns that are potentially available from a "steepening" or "flattening" of the U.S. Treasury yield curve through a notional rolling investment in U.S. Treasury note futures contracts.

"The most unique in the series are the steepener and the flattener ETNs," said Michael Johnston, founder and senior analyst at ETF Database. "This is unlike anything that's already out there. It allows investors to use a strategy that was not available before even with an ETF. Bets on the yield curve are not a new strategy. But it's new to the ETF and ETN space."

Johnston predicted that the steepener and flattener ETNs will be popular.

"It's a very interesting launch because a lot of people have an opinion on what's going to happen to the yield curve," he said. "I can see it as being a very popular strategy in the coming months as investors look to either bet on a flatter or steeper yield curve."

Wide demand

Edwards said that the new products originated from clients' interest.

"We see a very broad range of demand for yield curve strategies, from retail to hedge funds," he said. "Demand has been growing and is very wide."

Fixed-income investors who make bets on the shape of the yield curve have done so with traditional structured notes, which tend to have shorter maturities and often come from "reverse inquiries" from private banks, according to a source.

Ian Merrill, director and head of product origination, Americas, at Barclays' investor solutions group, told Prospect News that the two types of products - traditional structured notes and ETNs - will not compete with one another. He predicted the opposite.

"We see on a daily basis that our ETNs live quite well in parallel along the structured notes business," Merrill said.

"In fact, ETNs can help increase the liquidity in the underlying product because more people are trading. Clients like the daily put feature. We see ETNs and structured notes as distinct buckets that complement each other," he said.

Long and short instruments

Barclays launched six other ETNs giving investors long or short exposure to the two-year Treasury, the 10-year Treasury or longer Treasuries.

The iPath U.S. Treasury Two-year Bull ETN and the iPath U.S. Treasury Two-year Bear ETN give respectively a long and a short exposure to the Barclays Capital 2Y U.S. Treasury Futures Targeted Exposure index.

The iPath U.S. Treasury 10-year Bull ETN and the iPath U.S. Treasury 10-year Bear ETN give respectively a long and a short exposure to the Barclays Capital 10Y U.S. Treasury Futures Targeted Exposure index.

The iPath U.S. Treasury Long Bond Bull ETN and the iPath U.S. Treasury Long Bond Bear ETN are based on the Barclays Capital Long Bond U.S. Treasury Futures Targeted Exposure index, which tracks government bonds with a maturity in excess of 15 years.

Talking about the six "long" and "short" ETNs, Johnston said that he was "more skeptical."

"I really like the steepener and the flattener. The other six ETNs are not anything new. We already have two-year and 10-year ETFs. So yes, these are the first in the ETN space, but the ETFs do the same thing at a lower cost," he said.

The investor fees on the new iPath ETNs are 75 basis points.

The expense ratio fees for "two very popular ETFs" - the iShares Barclays 20+ Year Treasury Bond fund and the iShares Barclays 1-3 Year Treasury Bond fund - is 15 bps, Johnston noted.

"It's true that ETNs offer fewer tracking errors than ETFs," he said. "That may be why for some people it's worth to pay more."

Two-year and 10-year

Four out of the six "long" or "short" ETNs are also unique as they represent the first ETN vehicles for those strategies, said Edwards.

"We are the first to offer ETNs that give exposure to the two-year and 10-year Treasuries," he said.

On the long end of the curve, Deutsche Bank AG, London Branch in June issued two ETNs linked to the Ultra Bond futures, or CBOT Ultra T-Bond futures, a futures contract launched in January by CME Group Inc. based on long-term Treasury bonds with at least 25 years remaining to maturity.

A hedge with a view

Sources said that investors will be able to employ the new Treasury futures ETNs in various ways.

In some other cases, investors may use the ETNs to make directional bets on interest rates.

For instance, sources said that shorting Treasuries has become an attractive play among investors who anticipate rising interest rates. Some of them express a view anticipating a tighter monetary policy or inflationary pressures. Others do it as a hedge.

"Shorting Treasury has been a very popular long-term strategy because people reason that interest rates have no other way to go than up. But it may be a better strategy long term than short term because no one knows for sure when rates are going rise," said Johnston.

With the uncertainty around the yield curve's shape and the direction of future interest rates, investors are increasingly looking at ways to hedge their portfolio, sources said.

"The short allocations allow people to position their portfolio for an increase in yield or a decrease in price," said Edwards. "We see demand for those strategies as a hedging tool in order to adjust and calibrate the sensitivity of a general fixed-income portfolio to movements in the yield curve."

"We feel that the launch is very timely given all the interest in the marketplace in the movements of interest rates, which have macroeconomic consequences," said Merrill.

"People can take multiple views or a simple view. You can do a number of things with these products. It's a real tool kit," he said.

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