If you haven't noticed, the bull market cycle in bonds
(NYSEARCA:BOND) is starting to show major cracks. Some yields have
risen over 50% thus far in 2013! Is the 30-year bull
market in bonds finally breaking?
Nevermind the fact that the recent rising yield environment
shows the Fed's Quantitative Easing (QE) program is
failing. And nevermind that Ben Bernanke himself admitted he
too was also "perplexed" by this summer's fast rising yield
If yields continue to rise, eventually the Fed will start to be
a cost center as opposed to an income stream for the Treasury. This
will no doubt raise even more questions as to the
sustainability of the Fed's programs. Yields may
now be rising for good, which will trump any new band-aid the
Federal Reserve tries to throw at the problem.
In reality, the Fed is backed into a corner. And like a mouse
that's invested the public's capital, it's stuck in a room with the
elephant that is the world's private capital.
Eventually, the market always wins and the Fed is just one
other player in the $80+ trillion global bond market.
Rising Yields - What it Means
Who are the winners in a rising yield environment? Almost
no asset classes win because money is shifted back into
savings and income generating endeavors away from riskier more
capital appreciating mediums. Debt is paid down instead of
issued as the available capital contracts.
The rising cost of debt makes it less and less attractive as a
financing vehicle as it sucks more profits from companies and their
discount rates rise. Multiples eventually will contract in
such an environment as stock returns become less favorable when
compared to other available investments.
Investors will save more and get better returns on their
checking & savings accounts as they shift money back to now
neglected money market, CD, and cash accounts.
Investors should be aware of the coming rising yield environment
paying attention to a few of the signs we are watching for a
confirmation of the long term change in trend in the bond
The short and intermediate terms have confirmed a trend change,
and once the longer term confirms, investors should be fully
prepared for yields much higher than today's levels.
Rising Yields - What to Watch
ETF Profit Strategy Newsletter
I summarized the recent explosion in bond yields as we warned of a
steepening yield curve which has much larger and even more ominous
implications than just rising yields alone.
A rising yield curve means that interest rates farther out in
time are appreciating faster than interest rates with shorter
durations. The below chart shows the yield curve updated
through this week and displays the history of the yield curve and
why we see it as a major warning sign that recent bond yield
increases may not be near as bullish as many suggest.
A rising yield curve has been associated with every major
recession of the past 25 years ('90,'00, and '08).
Rising Yields - How to Protect
In May we were warning that a rising yield environment was around
the corner as our Technical Forecast readers were provided
analysis,charts, and trade alerts like "IEF remains the safer
Treasury bond fund","continue to switch bonds into shorter
durations", and "shorter term bonds such as the iShares 1-3 Year
Treasury Bond (NYSEARCA:SHY) or the SPDR Barclays 1-3Month T Bill
(NYSEARCA:BIL) remain the safer place for your bond money".
Since then, the iShares 20+ Year Treasury Bond (NYSEARCA:TLT)has
continued to underperform and is fast approaching a level that will
signal its longest term up trend is indeed over.
Those who shifted their Treasury exposure in the meantime have
gained over 9%.
The chart below shows this outperformance of the shorter duration
Treasuries since that time. As the bond market bear starts to
really growl, these shorter duration Treasuriesshould continue to
outperform their longer term counterparts.
As suggested in July in my article "
Is a Rising Yield Curve Bullish
," we also like buying the iPath US Treasury Steepener
(NYESARCA:STPP) to hedge from further rises in interest rates and
the yield curve. STPP should gain in price as interest rates
also continue to rise.
For more aggressive traders, a good entry point for the ProShares
UltraShort 20+ Year Treasury (NYSEARCA:TBT) is likely around the
corner and will take levered advantage of a Treasury bond trend
that continues downward. But given the inherent leverage in
some of these ETFs, timing is everything, so waiting for the right
entry opportunity is crucial.
uses technical, fundamental, and sentiment data to help keep
investors on the right side of the markets. The Treasury bull
is on its last legs and investors need to start prepping for an
environment of rising yields as we wait for our next high
probability trading opportunity in TBT and the Treasury
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