Bond investors are sailing into the perfect storm.
They’ve been lulled into a sense of complacency by the Fed’s promise of quantitative easing.
After all, with the Fed using principal payments from its mortgage-backed securities to buy up Treasury bonds, there’s a constant bid in the market.
So, Mom and Pop have thrown billions of dollars into bond funds over the past several months in an effort to boost returns on their savings.
And why not? With the Fed doing everything it can to keep interest rates low, bond investors should be able to look forward to calm waters and smooth sailing.
Of course, passengers on the Titanic were offered the same promise.
Look what happened to long-term interest rates last week…
So, despite the Fed’s best efforts and Mom and Pop throwing billions of their hard-earned savings into the bond market, rates still went up. In other words, demand couldn’t keep up with supply. So bond prices fell and interest rates increased.
Here’s another way to look at it…
The surge in rates last week shot the yield above the first resistance line at 3.9%. This week’s modest pullback caused the yield to come back and test the breakout level.
[ad#Google Adsense]If the breakout level holds and interest rates bounce higher from here, the trend has changed. We’ll be in a new rising-rate environment. The next stop for the 30-year yield is 4.1%… and then 4.3%.
To put it another way: The 30-year bull market in bonds is ending. The Fed’s 0% short-term interest rate policy and its quantitative easing have suckered everybody into the long end of the yield curve – just in time for the trade to capsize.
So if you need to be bullish on something, be bullish on interest rates. It looks like they’re heading higher.
Best regards and good trading,
Jeff Clark
[ad#jack p.s.]
Source: Growth Stock Wire