Barclays broke new ground last Tuesday (8/10/10) with the first exchange-traded products to target yield curve steepening and flattening. iPath US Treasury Steepener ETN (STPP) and iPath US Treasury Flattener ETN (FLAT) are designed to capture changes in the spread between 2-year and 10-year Treasury yields.
Both products are based on the Barclays Capital US Treasury 2Y/10Y Yield Curve Index. As exchange-traded notes (ETNs), STPP and FLAT are unsecured debt obligations of Barclays Bank. The ETNs carry an investor fee (expense ratio) of 0.75% plus a one-cent hit to the NAV on each “roll day” during the year. Why this “roll fee” isn’t rolled into the investor fee is not clear.
The underlying index seeks to achieve a 1 point increase for each 1 basis point increase in the spread between 2-year and 10-year Treasury yields. The ETNs then apply a multiplier, +$0.10 for STPP and -$0.10 for FLAT, to determine their price change. With initial values of $50, this implies that a 10 basis point (0.1%) change in the spread will result in about a 2% change in each ETN’s value. While the multipliers are less than one, they are applied against “basis points” so it is best to view these as leveraged products.
The index composition at the end of July had a 76% allocation to long positions in 2-year note yields and 24% to short positions of 10-year note yields. Barclays has published a Basics of Yield Curve Strategies (pdf) document for those wishing to learn more about these products.
iPath US Treasury Steepener ETN (STPP) seeks to capture returns that are potentially available from a “steepening” of the US Treasury yield curve. Refer to the STPP overview and STPP info sheet (pdf) for additional information.
iPath US Treasury Flattener ETN (FLAT) seeks to capture returns that are potentially available from a “flattening” of the US Treasury yield curve. Refer to the FLAT overview and FLAT info sheet (pdf) for additional information.
A 5% change in the yield spread from current levels could theoretically send the value of one of these two ETNs to zero. However, the 264 pages of prospectus and pricing supplements do not seem to address this possibility other than to say that the index can go negative and when calculating the indicative value “that if such calculation results in a negative value, the closing indicative note value will be $0.” There are also provisions for splits and reverse splits if the values exceed $100 or fall below $25.
Do not rush out and buy these until you have a full appreciation for how they will react to various market conditions. Investors who understand how they work will likely find them to be a powerful new addition to their investment tool belt.
It’s good to see that Barclays has embraced the iPath brand for these products instead of abandoning it as in the recent XXV launch. As part of the STPP and FLAT announcement, Barclays also rolled out six new bond ETNs that provide investors with the means of creating customized yield curve strategies.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.