Daily Gains Letter

15% Rise in 30-Year U.S. Bond Yields in One Month Reason to Sell?

By for Daily Gains Letter |

15% Rise in 30-Year U.S. Bond Yields in One Month Reason to SellThe recent decline in U.S. bond prices and the increase in yields have gotten a significant amount of attention. Some are saying the bond market is going to see a severe downturn ahead, while others are calling it a buying opportunity. Should investors jump in and short the bonds? Or should they buy even more?

Staying away from the noise, long-term investors shouldn’t just jump to a conclusion by looking at the short-term price movement. This behavior can cause a significant amount of damage to an investor’s portfolio.

Take a look at the chart below, which shows the yield on 30-year U.S. bonds:

30-Year T-Bond Yield Chart

Chart courtesy of www.StockCharts.com

Without a doubt, the yield has increased, shooting up in just a month to 3.27% from below 2.85%. Last time the yield on 30-year U.S. bonds increased by a similar amount, it took about three months, from mid-December 2012 to March of this year.

What’s certain is that the short-term momentum is clearly headed towards selling, with investors running away from long-term U.S. bonds. Since mid-July of 2012, the 30-year U.S. bond prices have been declining and are in an apparent downtrend, making lower lows and lower highs; the price of a 30-year U.S. bond has declined from $153.00 to currently hovering close to $141.00.

According to the Investment Company Institute, long-term bond mutual funds witnessed inflows of almost $16.1 billion in March. Sadly, comparing this to the inflows of March of 2012, they were 47% lower. At that time, inflows in the long-term bond mutual funds were $30.8 billion. (Source: “Historical Flow Data,” Investment Company Institute web site, last accessed, May 30, 2013.)

In spite of all the short-term pressure and looking at the grand scheme of things, the price of 30-year U.S. bonds is still in a long-term trend. Take a look at the chart below:

30-Year US Treasury Bond Chart

Chart courtesy of www.StockCharts.com

As it stands, the Federal Reserve is still buying long-term bonds—$45.0 billion worth every month—and it hasn’t really announced when it will end or slow the pace of its purchases. This can keep the prices high and bring the yields down lower.

On top of this, the reasons for staying in safe assets haven’t diminished. The problems in the eurozone still persist, with stronger nations like Germany and France seeing dismal economic performance; China is expected to show low growth; and overall conditions in the global economy are turning bleak.

At the very best, it is still too early to say if the bond market has turned completely, and will only head lower from here. Investors should practice caution at this point and take profits off the table (if they have accumulated any). Remember, bonds operate on a long-term cycle, and it can take months for things to change.

Once the bond market turns and heads lower, investors can profit from exchange-traded funds (ETFs) like ProShares Short 20+ Year Treasury (NSYEArca/TBF). This ETF provides investors with the inverse return of U.S. bonds that have a maturity of more than 20 years. This means that as long-term U.S. bonds decline by one percent, this ETF rises in value by the same amount.

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