Thursday, August 9, 2012
That "hissing" sound you hear is the air leaking out of the bond market bubble.
No one seems to notice – or, rather, no one seems to care – that interest rates have spiked over the past two weeks...
The yield on the 10-year Treasury note bottomed at an historic low rate of 1.4% two weeks ago. Yesterday, it closed at 1.62%. That's a 15% increase in borrowing costs. And it likely signals an intermediate reversal in the direction of interest rates. Take a look...
In two weeks, the 10-year yield has recovered everything it lost in the previous two months. More significant, we now have a new series of higher highs and higher lows on the chart. We haven't seen that happen off a deeply oversold level since last September when rates bottomed at 1.7% and then rallied to 2.4% six weeks later.
A similar move this time would prop the 10-year note yield to 2% – basically right back to where it was in April. That's horrible news for bond investors. It'll wipe out all the gains of the past few months. And anyone who bought bonds recently as a gamble that the Fed would announce a new quantitative easing program will suffer large losses.
Think about it... the iShares 20+ Year Treasury Bond Fund (TLT) was trading at $110 per share back in April. It peaked at $131 two weeks ago. A move back down to $110 will crush most bond investors.
And it's not just the bond market that's in danger. Real estate investment trusts (or "REITS") have enjoyed an enormous rally as interest rates have fallen. If rates keep ticking higher – even just for the next few weeks – REIT owners will give up a lot of those gains.
If you own interest-rate sensitive securities – like bonds and REITs – now is the time to get defensive. Take some profits off the table... or at least tighten your stops so you don't give up your gains.
Aggressive traders should consider short selling long-term Treasury bonds or REITs.
Best regards and good trading,
Read more of Jeff's recent ideas here...
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