NEW YORK (TheStreet) -- IPath, the industry leader in exchange traded notes, came out with a full suite of ETNs tied to the U.S. Treasury futures market.

The new funds are the

U.S. Treasury 2-Year Bull ETN

(DTUL);

U.S. Treasury 2-Year Bear ETN

(DTUS);

U.S. Treasury 10-Year Bull ETN

(DTYL);

U.S. Treasury 10-Year Bear ETN

(DTYS);

U.S. Treasury Long Bond Bull ETN

(DLBL);

U.S. Treasury Long Bond Bear ETN

(DLBS);

U.S. Treasury Steepener ETN

(STPP); and

U.S. Treasury Flattener ETN

(FLAT).

The funds are not bond funds to be bought by yield-seeking investors; they are a means to speculate, or possibly hedge, on the direction of Treasury futures. For example, the U.S. Treasury 10 Year Bull ETN is a bet that 10-year Treasury futures will go up in price. Unlike similar funds from other product providers, these funds provide single or unlevered exposure as opposed to double or triple exposure from other fund providers.

The positive aspect of the ETN wrapper is that tracking errors should not be an issue; the strategy underlying each fund rolls from one month to the next in the futures market. The downside to the ETN wrapper is that holders of these funds will hold unsecured debt of

Barclays

(BCS) - Get Report

. Should Barclays fail -- admittedly a low-probability event -- these funds would also fail. A similar fate befell holders of a Bear Stearns ETN a couple of years ago.

Aside from not paying any yield, another point of differentiation that the ETNs have from regular Treasury bond funds is that they have much higher management fees: 0.75% compared with a range of 0.10% to 0.20% for regular Treasury ETFs. The fee is reasonable given the index's strategy of navigating through the futures market versus just holding plain vanilla bonds.

Of most interest with these funds are the US Treasury Steepener ETN and US Treasury Flattener ETN -- two truly new ideas for the exchange traded product industry. There is nothing new about gaming the widening or narrowing of spreads for hedge funds, of course, but these two funds democratize the strategy for individual investors who for one reason or another may not have access to the futures market.

The funds play the two-year futures against the 10-year futures. The Steepener fund bets on the spread between yields getting wider by shorting the 10-years and going long on the two-years. The Flattener ETN does the opposite to capture the spread between those yields narrowing. If it is not clear, the Steepener ETN would go down in price if the yield curve flattens.

In general, the yield curve tends to steepen early in an economic cycle and begins to flatten as an economic cycle matures and moves toward the next recession. While not infallible, this has been somewhat reliable in the past.

Unfortunately for anyone interested in this type of trade, and maybe for iPath, the Treasury market is being distorted by a now long-standing Fed policy of zero-percent interest rates; various stimulus programs and deficit spending that are causing Treasury issuance to skyrocket; and a meeting this month in which the "Federal Open Market Committee directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities (agency MBS) in longer-term Treasury securities."

This operation of buying Treasuries will focus along the curve between 2- and 10-year issues and obviously could be at either end of that maturity range or anywhere in between. This means that playing these funds successfully means guessing correctly on what the Fed might buy next.

The innovation and access to potentially sophisticated tools is unambiguously positive, and the distortions that exist now are temporary. They just make these funds much more difficult to use until the market begins to function normally again.

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At the time of publication, Roger Nusbaum had no positions in the securities mentioned.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

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