TUA: The Tao Of T-Bonds ======================= Jul. 03, 2025 12:19 PM ET, 2.44K Followers Follow Play(7min) Summary * TUA offers duration exposure in the T-bond market. * The ETF has done well this year, as markets still price in more rate cuts in the next couple of years. * The Fed may not meet the current market outlook on rate cuts if inflation or economic weakness don't materialize. * The current state of the yield curve, which is driven by fiscal and trade policies, could add a new layer to TUA's risk. Worawith Ounpeng The treasury market has had a turbulent year so far, as investors continue to assess how America’s fiscal and monetary policies will shape the US economy in the coming years. For the Simplify Short Term Treasury Futures Strategy ETF (NYSEARCA:), these changes have helped boost its price; however, the current state of the bond market also raises some risks for this ETF that are worth considering. This ETF maintains roughly 5X leverage in 2-year US Treasury futures contracts (while the rest of the fund’s assets are mostly short-term T-bills) to simulate the ICE 7- to 10-year US Treasury bond index. This fund is targeted toward investors who want exposure to the duration of 7-10 year T-bonds, similar to ETFs such as the iShares 7-10 Year Treasury Bond ETF () – although the latter does so by holding US Treasuries at such maturities and doesn’t use leverage. Due to TUA’s difference in holdings, the fund has a higher of 9.67 years compared to the ’s seven. This difference plays a role in the reaction of each fund to changes in interest rates: The former has higher sensitivity to such changes, which could pay off in case of a rate cut. However, one factor that could affect the ETF’s performance is the shape of the yield curve. **The Yield Curve and TUA** Due to the high uncertainty in the financial markets regarding trade, fiscal policy, including Trump’s Big Beautiful Bill Act, and the Fed’s policy, the yield curve is significantly twisted. Yield Curve, as of June 30, 2025 (FRED) Specifically, the yield curve appears to be inverted at the front end, so that the two and three-year bond yields are much lower than those of short-term bonds, while longer-term bonds are acting more "normal" as they rise along the curve. What could explain this state of the yield curve? One factor is the term premium (TP) that provides compensation for the added risk of holding a long-term bond over a short one. According to the Federal Reserve Bank of New York , the term-premium has declined for the 2-year and risen for the 7-10 year bonds; so that, the 7-year T-bond’s TP is around 35 bp while the 2-year’s is -10 bp (yes negative!). This sharp contrast suggests a high demand for the 2-year bond, as investors are flocking to such bonds, anticipating interest rates to come down. The market also signals concerns over the long term due to heightened uncertainty about inflation, likely stemming from Trump’s policies on trade. Despite the decline in short-term rates, long-term rates haven’t fallen by much. This disconnect began in 2024, as shown in the chart below, when examining the 3-month, 2-year, and 10-year yields. Chart of 3-month, 2-year, and 10-year Bond Yields (FRED) Looking forward, this disconnect could widen. Take, for example, the Big Beautiful Bill Act, which has recently been voted in the Senate and could become law by the weekend. It is expected to add $3.4 trillion to the US national debt over the next decade, according to the . Such a rise in debt is likely to drive higher long-term T-bonds, even as short-term rates fall. The economic ramifications of this legislation may push up the term premium of LT T-bonds, making such bonds relatively cheaper compared to medium-term bonds, which are more affected by short-term economic outlook and inflation expectations over the next couple of years – these factors will play a significant role in the Fed’s policy. Following the recent , the Fed maintained its "wait and see" approach and still penciled in two more 25-bp rate cuts this year, likely in September and another in December; hence, the FOMC will likely start to signal a cut by the next meeting in July. However, they have also raised their projections for the rate outlook in 2026 and 2027, to include only one additional 25bp cut in each. In comparison, the markets are still expecting rates to come down to by the end of 2026. These dovish expectations have pushed 2-year bond prices up and could affect TUA’s performance. While rising bond prices should help boost the ETF’s performance, if the prices of 2-year bonds rise significantly more relative to the prices of 7-10 years T-bonds, it could affect the ETF’s return as they roll over the future contracts quarterly. And since TUA has a higher duration relative to other ETFs, such as IEF, it’s more sensitive to interest rate changes, which could backfire if the markets are too dovish relative to the current Fed outlook, potentially leading to an upward course correction. One way a market correction could occur is through the progression of inflation. **Inflation and All That Jazz** While the term premium shows high uncertainty at the long end of the yield curve, inflation expectations have remained for the . So, for now, inflation hasn't reared its head, based on the , despite the high-end uncertainty over Trump's trade war that could harm the progress the Fed has made in taming inflation. For the bond market, how inflation will develop could shape its progress, if the trade war, which has been marginalized in recent weeks in the news cycle, turn out to have only a transitory and limited effect on the economy and inflation, that would be good enough to let the Fed continue cutting rates, albeit at a more cautious way than it did in 2024. However, there is also a downside risk in which the Fed cuts more aggressively if the economic data shows signs of weakness – hence the high uncertainty in the bond market. **Bottom Line** The current state of the bond market is messy to say the least, while investing in bonds during times of uncertainty could be a prudent thing, this ETF might have some more complexity that could make investing in such an instrument a bit tricky considering its duration, the state of the current medium term bond market, and the yield curve so, while this investment may offer a higher return if and when the Fed were to start slashing rates again, as the market currently expects, the high uncertainty over how the economy will progress due to rapid changes in fiscal and trade policy could heighten the risk of this ETF not paying off.

TUA: The Tao Of T-Bonds (NYSEARCA:TUA)

The Tao Of T-Bonds ETF (TUA) provides exposure to the U.S. Treasury bond market, leveraging 2-year Treasury futures contracts to simulate the ICE 7-10 year Treasury bond index. The ETF's performance is influenced by the yield curve's inverted shape, Fed rate cut projections, and fiscal policies like the Big Beautiful Bill Act, which could impact long-term Treasury bond prices.