By Ambrose O’Callaghan
The Harvest Premium Yield Treasury ETF (HPYT:TSX) was launched on September 25, 2023 and the Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX) was launched on January 16, 2024. This is now the largest Covered Call Fixed Income ETF Suite in Canada. It has accumulated over $500 Million in assets under management (AUM) as at August 8, 2024.
The Harvest Premium Yield Treasury ETF (HPYT:TSX) is nearing that one-year anniversary. Built from a portfolio of ETFs which hold longer-dated US Treasury bonds that are secured by the full faith and credit of the US government, HPYT employs up to 100% covered call writing to maximize monthly cash flows for higher yields.
Back in September 2023, Harvest ETFs’ investment management believed that the current interest rate tightening cycle was at or near its peak. With that in mind, the timing seemed right for an investment strategy that factored in high interest rates while preparing for the eventual downward move. This thinking spurred the launch of HPYT. It then ballooned its way to the top as the largest covered call bond ETF in Canada. As of August 8, 2024, its AUM was sitting at $435.95 million.
The period of high interest rates has lasted longer than many prognosticators may have originally predicted. Recent reports have suggested that the United States Federal Reserve is expected to pursue its first interest rate cut in September 2024. Should that materialized then such downward move would be an appropriate one-year anniversary for HPYT and its unitholders.
Why consider exposure to US Treasuries?
The Canadian consumers may not have celebrated the rise of interest rates. On contrary, many Canadian savers saw higher rates as good news. Yields on traditional fixed income products that were in the dumps during the 2010s and historically low interest rates, rebounded nicely in the 2020s.
US Treasuries still represent an attractive option for investors who want to take advantage of high yields. US Treasuries are among most secure fixed income investments available to prospective buyers. Carrying the full faith of the US government, makes them secure and highly dependable.
The bottom line is that treasury yields are still high, and the security and safety of US Treasury bonds make exposure to them attractive.
Why lower yields may benefit HPYT
On Thursday, August 1, 2024, the benchmark 10-Year Treasury yield traded at 3.983%. That represented the lowest level since February 2, 2024. Meanwhile, the 2-year Treasury yield slipped to 4.18%.
As we have previously detailed, bond yields and prices move in opposite directions. This is an environment where HPYT has the potential to shine. HYPT employs an active covered call writing strategy on long-term bond ETFs, which means that its monthly cash distribution is designed to continue to pay high income, every month. Moreover, a lowering of bond yields in the market could vault bond ETF prices upward going forward, giving HPYT a boost in capital appreciation.
Since its inception, HPYT has paid out a monthly cash distribution of $0.1500 per Unit since. HPYT’s NAV per unit has dropped 7.76% year-over-year as of close on August 1, 2024. It closed at $11.12 per unit compared to its debut NAV of $12.00. Designed predominantly as an income product with the potential for capital appreciation, HPYT has delivered very high monthly income over that same stretch. Taking the monthly distributions into consideration, an investment in HPYT since inception has so far delivered on its objective.
For investors who are seeking high monthly income but less volatility on the maturity spectrum, there is the Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX). HPYM writes covered calls on a portfolio of US Treasury ETFs that primarily hold mid-duration U.S. bonds with average maturities of 7-10 years. As of August 8, 2024, its Aum was sitting at $98.03 million.
This ETF has paid out a monthly cash distribution of $0.0800 since inception. It debuted at a NAV price of $12.00 per unit, and is currently trading at $11.63 per unit as at August 8, 2024. HPYM does not offer the very high monthly distribution that HPYT has delivered since its launch, but it has provided more price stability.
