For reasons I can’t fathom, investors are obsessed with central bankers, hanging on their every word, parsing out every little detail or tone of voice.

For the better part of a decade, we’ve seen this obsession send markets zooming ahead in moments, or selling off steeply just as fast, all totally divorced from economic fundamentals.

[ad#Google Adsense 336×280-IA]So they can bring gains or losses in short order, but I submit that, in fact, nearly seven years of near-zero, zero, and sub-zero interest rates have made it clear that central bankers have lost control, with very little in the way of real influence beyond short-term rates.

Long-term rates, which have a much broader impact, remain subject to market forces.

And today I want to share with you a chart that shows those rates are on the cusp of a secular trend that’s going to make early investors a ton of money, once they know how to bet…

Short-Term Rates Are a Mess… but That’s Not the Real Story

Yellen & Co. have promised lower for longer. Even supposed hawks think any hikes should come at an extremely slow pace. Major European central banks, along with Japan, have already pushed rates below zero.

Together they’ve bought trillions in bonds to keep rates low. Some have resorted to buying corporate bonds, but could soon be running out of inventory.

The central banks are out of strategic depth, with their backs to the wall. There’s no more room to maneuver. This is most aptly illustrated by the following chart, courtesy of The Wall Street Journal.

Short-term negative rates (you know, the kind Yellen insists she’s not even considering), are becoming even more common where they already exist.

The unthinkable is becoming normal.

Two cases in point are Henkel AG & Co KGaA (OTCMKTS ADR: HENOY), the German household products company, and Sanofi SA (NYSE ADR: SNY), the French pharmaceutical company. They are about to become the first private non-financial enterprises to issue bonds with a negative yield.

Already, over $13 trillion of sovereign bonds promise to return less than your original capital.

Observing these increasingly negative rates, along with a growing inventory of negative-yielding bonds, it would be natural to conclude that rates are going down.

Well yes… and no.

You see, short-term rates have been mainly trending down, but that’s not the case for longer-term rates.

Back in July, the 10-year Treasury looks like it may have bottomed. That in itself would be highly significant for the world’s most widely watched interest rate.

A little over two weeks ago, we saw a breakout in the 10-year Treasury yield, which jumped higher from its range of the past couple of months.

The 30-year yield is an almost exact replica of the 10-year chart.

Here’s what I think is really going on…

When the August jobs report was released on Sept. 2, a funny thing happened – and I’m sure I wasn’t the only one who noticed.

Nonfarm payrolls increased by just 151,000, while Wall Street economists surveyed expected 180,000. That kind of underperformance would normally cause the market to expect a rate hike to be put off as the Fed tries to remain accommodative due to weak employment.

Instead, rates rose, meaning bonds sold off. That was the opposite of what was expected. When the market provides signals like this, it’s often worth paying close attention.

We may have seen the birth of a brand-new secular trend in bonds.

So it’s time to get in position for lower bond prices and rising yields.

Spending Will Drive Treasuries Down

One of the biggest reasons this is likely happening now is that the market senses inflation’s about to head higher.

In my view, the trigger for this is fiscal spending is ramping up as governments worldwide are desperate to stimulate economic activity.

[ad#Google Adsense 336×280-IA]I’ve been saying this for a while.

And now Jeffrey Gundlach, DoubleLine Capital chief investment officer and notable bond manager, believes investors should prepare for rising interest rates and inflation.

He also says both Clinton and Trump support infrastructure spending, so it’s coming in a big way no matter who wins.

That’s because low and even negative rates from central banks have (big surprise) shown diminishing returns.

So, for good or ill, governments will ramp up spending and pick up the slack.

Just one example is Canada’s Prime Minister Justin Trudeau, who’s made a series of big infrastructure announcements whereby the federal government will be spending $125 billion in the next decade.

That’s getting (again, big surprise) encouragement from the International Monetary Fund’s managing director Christine Lagarde.

After a recent meeting with Canadian Prime Minister Trudeau, Lagarde said, “I really very much hope that Canadian economic policies can actually go viral.” The IMF wants governments to do their part to help kick-start economic activity globally, and they’re not shy about saying so.

Get Short Treasuries Now and Get Paid Long Term

All this is pointing to rising inflation and rising rates.

And the simplest way to bet on higher rates is through the Proshares Short 20+ Year Treasury ETF (NYSE Arca: TBF). It’s a $600 million fund designed to rise at the same rate as long-term Treasuries drop. TBF is an inverse fund, so if long-term Treasuries rise, TBF will fall as the same rate.

Right now, it’s been acting well, as it looks to have bottomed in July and recently surged past the resistance levels of the last two months.

My suggestion is to add TBF to your portfolio now and use a hard stop at $20.30, the July low. That’s just 5% below current levels. I think on the upside TBF could regain $25 within 12 months, maybe sooner. So you’d be risking 5% for a potential 20% gain.

Right now the signs point to lower bond prices and higher rates.

Remember all trends, even secular trends, come to an end and then reverse.

If you catch them early, they can be very profitable.

— Peter Krauth

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Source: Money Morning