Suddenly, Bond Yields May Shine Over Stocks (TBT, TLT)

QE2 has so far had no impact on keeping Treasury bond yields lower.  Lower taxes, higher deficits, European bailouts, and a still-present race by nations devaluing currencies are all to blame.  The rise seen in longer-dated Treasury maturities should be nothing short of alarming for investors.

Nothing illustrates the rise in yields and the drop in prices of long-dated Treasury maturities better than the highly volatile ProShares UltraShort 20+ Year Treasury (NYSE: TBT).  Keep in mind that this one has double-leverage and that it is inverse leverage.  At 10:50 its price is up another 1.2% at $37.94 but that was trading as low as under $35.00 back on November 30.  The high hit yesterday was $38.26 and that was the highest price seen since mid-November when shares hit $38.29 and $38.27.  You have to go back to the end of June to see other $38+ prices.

The ‘regular way trade’ on the 20+ year maturities that is a bet on rates falling and Treasury prices rising is the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT).  It does not have the leverage and it is not inverse.  As rates rise and bond prices fall, the TLT loses value and that can be seen with a 0.8% drop today to $93.43.

A headline from the DJ broad-tape noted that the 10-Year Treasury yield of 3.267% was the highest yield in nearly six months.  We now show a 10-Year yield of 3.25%.  This may still be extremely low on historic terms, but this rate was down all the way at 2.48% back on November 4 and was at 2.76% as recently as November 23.  Just on Monday that had come back down to 2.94% after briefly going back above that whole number of the 3.00% hurdle.

The 30-Year Long Bond yield is now 4.40%.  This also may still be extremely low on historic terms, but this rate was down all the way at 4.04% back on November 4 and under 4.00%  on November 2.  The 30-Year yield was at 4.17% as recently as November 23.  Just on Monday that had come back down to 4.25%.

The big question is a post-QE2 question.  The Fed has signaled that it wants you to own risk-based assets because it won’t pay you much interest and that real rate of return may be far less if inflation kicks in.  When you see a 75-basis point rise in the rate of the 10-Year Treasury yields, the question is whether investors will decide to lock in their equity and commodity gains and settle for the safety of the Treasuries at a new benchmark.

So far this is the second day where we have seen a rapid drop in equity index values.  The DJIA peaked above 11,440 yesterday but it closed marginally in the red at 11,359.16. The DJIA is now in the red again down almost 15 points at 11,343.99 after having been up about 20 points earlier this morning.

Another bit of food for thought… If you have not refinanced your house to capture those lowest rates ever, you better see if you can qualify for that refinance.

JON C. OGG