You heard it here first: The intense focus by the media and Wall Street on the timing of the Federal Reserve’s QE taper is a giant distraction. And so is the wasted effort of meticulously combing through the FOMC’s meeting minutes. Ignore the noise!
In contrast, the bond market’s performance tells us almost everything we need to know. What’s it saying right now?
Despite the Fed’s attempt to keep long-term interest rates from rising, via its $85 billion of monthly QE Treasury bond purchases, the 30-year Treasury Yield
) is up almost 30% over the past year alone. (See chart) Likewise, 30-year Treasury yields are now back above 3.75% and have jumped the most in two-months. The trend of higher yields (rates) is here regardless of what the Fed does or says!
Buyers of long-term Treasuries (like the Fed) beware. You have already seen the value of your bonds erode by roughly 11% over the past year. Is more pain ahead? When bond yields rise, as they are right now, bond prices fall. The accompanying chart visually illustrates this inverse relationship between bond prices and yields along with why being bearish on long-term Treasury prices has been the right place to be.
The trend of higher yields is nothing new to our readers. We have alerted readers of falling bond prices multiple times this year and have been able to get profitable trades in 2x inverse Treasury ETFs and related funds that are designed to go up with bond prices drop. Not only has this major trend been atop our monthly Mega Investment Theme Report in the ETF Profit Strategy Newsletter, but it’s among this year’s biggest investment trends.
Aside from strategic trades, investors with core bond positions as part of a diversified portfolio will do best to choose Treasuries that have maturities of 10 years or less.
In summary, listen to what the bond market says ahead of what the Fed says. Why? Because market prices are always a leading indicator.
Editor's note: This story by Ron DeLegge originally appeared on ETFguide.com
To read more from ETFguide, see:
Commodities Send Deflationary Warnings
Is Now the Time to Buy China?
Beating Low Yields in a Low Rate Environment
No positions in stocks mentioned.