Over the past three years, the US Treasury yield curve has flattened to the point where investors are accepting virtually no return in exchange for a safe haven. Since yields can’t decline any further, the yield curve has to steepen at some point, and we think that will likely happen this year despite the Fed’s commitment otherwise.

With the US economy on the mend, an assessment that nine of the 10 members of the Federal Open Market Committee were in concurrence with after their last meeting, the Fed’s overt approach to communicating its interest rate policy may have already achieved its end. And since the Fed was woefully behind the curve in addressing the last debt bubble–and arguably was a contributing factor to that bubble after maintaining interest rates at levels that were too low for too long–it may be looking for a way out of its current pledge to maintain low interest rates.

While we don’t expect rates to skyrocket any time soon, we do believe the yield curve will begin to steepen in the coming months. So it’s prudent to put on a hedge to help insulate our Portfolio from that possibility.

iPath US Treasury Steepener ETN (NYSE: STPP) is the best way to play a steepening yield curve.

The exchange-traded note’s (ETN) underlying index tracks the spread between 2-year and 10-year Treasury futures; when the spread widens, iPath US Treasury Steepener ETN gains in value.

While we’re generally leery of these more esoteric investment products, iPath US Treasury Steepener ETN appears to function precisely as designed. It also charges a reasonable 0.75 percent annual expense ratio, which is at the lower end of the range for specialty exchange-traded products.

iPath US Treasury Steepener ETN, the newest addition to our Income & Hedges Portfolio, rates a buy below 45.

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