New short-bond ETFs facilitate interest rate hedging and directional views

Deutsche Bank has listed short-bond ETFs on the London Stock Exchange as an interest rate hedge or for taking directional views on UK and US sovereign debt

Db x-trackers, the exchange-traded fund (ETF) business of Deutsche Bank, has listed short-bond ETFs on the London Stock Exchange, giving investors exposure to any fall in the value of UK or US sovereign debt.

The ETFs track the Deutsche Bank UK Gilts Short Daily Index and the Deutsche Bank US Treasuries Short Daily Index. Given their relative complexity compared to long equity ETFs, the products are aimed at the institutional investor market.

"Retail investors can buy the ETFs because they are listed on an exchange, but we emphasise that these products are suitable for people who understand how the short index works," says Manooj Mistry, head of db x-trackers at Deutsche Bank in London. "If you look at the ETF market in Europe it is mainly institutional so we see that as the main market, but more sophisticated investors who understand the bond market could invest in this as well," says Mistry.

He says the bank expects most interest to come from investors wanting to hedge themselves against a rise in interest rates. "We see this being used as a hedging tool. If you have a portfolio of bonds and you are worried about interest rates going up and the value of bonds falling, you can use this to hedge against that. If you have a directional view and expect the bond market to fall you can also use the ETF to take a tactical position."

Despite their complexity, Manooj says there are no listed restrictions or requirements, and adds that the most important thing is providing liquidity. "The key thing is to make sure you have the market making to support the trading of the product. That needs to be supported by tight spreads and attractive pricing - those are the key areas to look at as an issuer."

The ETFs are both listed in London, where the exchange allows for listing in US dollars. Mistry says they may be listed elsewhere in future, though as they are institutional products, investors from other countries will be able to access them.