If you haven't noticed, the bull market cycle in bonds 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?
Never mind the fact that the recent rising yield environment shows
the Fed's Quantitative Easing (QE) program is failing. And never
mind that Ben Bernanke himself admitted he too was also "perplexed"
by this summer's fast rising yield environment.
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
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, and 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
and 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 market.
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
In our August 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 chart below 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 1-3 Month 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
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 Treasuries should 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.
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
Editor's note: This story by Chad Karnes originally appeared on
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