The blood bath in the bond market this month suggests bond
king Bill Gross may have hit the nail on the head when he
declared earlier this month the death of the 30-year bull run in
The founder and co-chief investment officer of Pacific
Investment Management Co. and manager of the world's biggest bond
fund said the specific time of death likely occurred on April 29,
when yields on the benchmark 10-year Treasury bond rose to
Bernanke Sell Off
Bonds sold off Wednesday as the yield surpassed the
psychologically significant round number of 2% for the first time
since March. On Wednesday, Federal Reserve Chairman Ben Bernanke
testified on Capitol Hill and the Fed released its latest minutes
that indicated some members were wanted to take the punch bowl
away on is quantitative easy policy as soon as June. Bond prices
and yields move in opposite directions.
iShares Barclays 20+ Year Treasury Bond ETF (
) has shaved off 5.70% month to date and is 12% off its 52-week
high in July.
PIMCO 25+ Yr Zero Coupon U.S. Treasury Index ETF (
) tumbled 9% so far in May and is 20% off its high.
This is particularly painful for investors who look to bonds
as a safe haven and source of income. And to add insult to
injury, the more volatile SPDR S&P 500ETF (
) added nearly 4%.
Rising Rates, Falling Prices
Bond prices and yields move in opposite directions.
face losses as interest rates rise.
The longer a bond's duration the more sensitive it is to
interest rate changes. Every year of duration roughly amounts to
a one-percentage-point change in price for every
one-percentage-point change in yield. So a 10-year bond would
fall 10% in price for every 1% gain in the yield. A 30-year bond
would fall 30% for every one percentage point rise in yield.
Ten-year Treasury yields are projected to rise to 2.5% by
year's end, 2.7% by the second quarter of next year and 2.9% by
the fourth quarter of 2014 on expectations that the Fed will
possibly start tapering purchases at its September meeting in
addition to shrinking its balance sheet, according High Frequency
Economics, based in Valhalla, N.Y.
"Of course, that will be conditional on the data between now
and then; the labor market must continue to show clear
improvement, and inflation needs to at least stabilize," Jim
O'Sullivan, chief U.S. economist at HFE.
The Fed's effect on the bond market depends on how long the
market expects the Fed to keep its bond holdings.
"The chairman's suggestion that the Fed might never sell its
holdings should help hold down yields today, not just during the
eventual tightening cycle," O'Sullivan added.
Howard Potter, a fixed-income portfolio manager at the
Roosevelt Investment Group in New York, expects 10-year bond
rates to remain range bound between 1.7% to 2.0% for about
another year or two because demand for U.S. Treasuries remain
strong and they're competitive against other countries' bonds in
the face of stalling inflation globally.
Bond ETF Fund Flows
Investor appetite for bond
in the second quarter has increased significantly from the first
three months of the year. In the first quarter, inflow into
fixed-income ETFs totaled $6.9 billion, about 11% of all ETF
flows, according to CovergEx Group citing data from XTF.com. So
far in the second quarter, investors poured $11.5 billion into
fixed-income ETFs, accounting for nearly a third of total ETF
Investors could make a bullish move in a bear market with
inverse bond ETFs such asProShares UltraShort 20+ Year Treasury (
),iPath U.S. Treasury Long Bond Bear ETN (
),ProShares UltraShort 3-7 Year Treasury (TBZ).
"Typically the leveraged ETFs are better as trading vehicles,"
Ronald Lang, principal at Atlas Wealth Management in Philadelphia
with about $20 million in assets under management, said in an
email. "Depending on your life stage, these ETFs could be a
minimum of 10% and as much as 35% of your portfolio."
However, inverse ETFs are designed to reflect the inverse
one-day moves of the underlying security and so their returns
will not reflect the opposite returns on a long-term basis.
Inverse Bond ETFs
Direxion Daily 20 Year Plus Treasury Bear 1x Shares (TYBS)
Direxion Daily 7-10 Year Treasury Bear 1x Shares (TYNS)
Direxion Daily Total Bond Market Bear 1x Shares (SAGG)
iPath US Treasury 10-Year Bear ETN (DTYS)
iPath US Treasury 2-Year Bear ETN (DTUS)
iPath US Treasury 5-year Bear ETN (DFVS)
iPath US Treasury Flattener ETN (FLAT)
iPath US Treasury Long Bond Bear ETN (
PowerShares DB Inverse Japanese Government Bond Futures ETN
ProShares UltraShort 20+ Year Treasury (
ProShares UltraShort 3-7 Year Treasury (TBZ)
ProShares Short 20+ Year Treasury (TBF)
ProShares Short 7-10 Year Treasury (TBX)
ProShares Short High Yield (SJB)
ProShares Short Investment Grade Corporate (IGS)
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