Cboe Delists Bearish Bond ETN After Haven Rush Spurs 70% Tumble

Relentless Treasury Surge Spurs Reckoning as Cboe Delists ETN

(Bloomberg) -- To put it mildly, betting against the Treasury market has been a painful trade for the last two months. Now, securities offering quick entry into such positions via the stock market are facing an existential crisis.

The $451 million ProShares UltraShort 20+ Year Treasury fund, or TBT, plunged to the lowest since it was launched during the global financial crisis, before trading was halted. Meanwhile, the Chicago Board Options Exchange delisted the iPath US Treasury Long Bond Bear exchange-traded note, DLBS, Barclays Plc said in a statement. The $931,000 ETN had tumbled 70% in 2020 through Friday.

And the situation may get worse for other products betting against the world’s largest bond market. The rush for haven assets intensified after Saudi Arabia declared an all-out oil price war, adding to the wall of worries over a looming recession and signs of strain in credit markets. The entire U.S. yield curve fell below 1% for the first time in history on mounting expectations the Federal Reserve will cut rates to zero in the coming months.

“There’s a lot of exotic and dangerous products in the exchange-traded ecosystem, and this is a reminder of that,” said Eric Balchunas, an ETF analyst for Bloomberg Intelligence.

Benchmark 10-year yields dropped as low as 0.31%, while 30-year rates dipped below 0.7%. That’s been a boon for bullish Treasury funds such as the $23 billion iShares 20+ Year Treasury Bond ETF, ot TLT, which rose to a record high on Friday.

Before the CBOE notice on the delisting, Barclays announced a reverse split of DLBS and two other ETNs. The issuer planned on a 1 for 25 reverse split of its $9 million iPath US Treasury 10-year Bear ETN, or DTYS, and a 1 for 15 ratio for its $3 million Barclays Inverse US Treasury Composite ETN, or TAPR, effective on March 16.

Reverse splits normally follow big declines in certain securities, and are a maneuver used many times to prevent delisting. However, a recovery depends more heavily on the Treasury rally reversing, according to CFRA Research.

“The reverse split adjustment is larger than normal due to the aggressive move in Treasuries in recent weeks,” said Todd Rosenbluth, CFRA’s director of ETF research. “But demand will be more impacted by investor optimism for lower Treasury bond prices.”

The DLBS situation “echoes” the demise of the VelocityShares Daily Inverse VIX Short-Term ETN, ticker XIV, according to Balchunas. XIV was forced to liquidate in February 2018 when volatility spiked. However, assets in XIV topped $2 billion in the previous month, while DLBS holds less than $1 million, he said.

Another key difference is the sheer size and liquidity of the $16.9 trillion Treasury market. Should DLBS and similar funds end up being forced to liquidate, it’s not enough to impact Treasuries in the same way that XIV’s blow-up rocked volatility, according to Greenwich Associates.

“There is likely to be additional suffering, but probably not insanity like February 2018,” said Ken Monahan, a senior analyst covering market structure and technology at Greenwich.

©2020 Bloomberg L.P.

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