Going negative

Economists keep telling us that interest rates will rise, but just the opposite is happening.  At the end of January the yield on the US 10-year note fell to 1.67% – its lowest level in 20 months. Low rates are a challenge for the nation’s senior citizens, but America is actually a bright spot among developed countries around the world. Yields on European and Japanese government bonds have dipped below zero, which means investors who buy these bonds are essentially taking a loss just to hold the asset. What’s driving rates going negative? Fear – fear of deflation, fear of volatility, fear of the unknown.

When interest rates fall, bond prices rise so you might think international bond funds would be trending up. However, that’s not the case right now due to the strong US dollar. My newsletter tracks both intermediate and long-term trends for the international bond market using SPDR Lehman International Treasury Bond (BWX), a $2 billion ETF, as a proxy.  My major-trend model turned bearish on September 12, 1014. The intermediate-trend model, which is more active and generally trades a few round-trips a year,  issued a sell signal on July 30, 2014. Looking at the multi-year chart of BWX, the international bond fund market could be nearing a turning point. The area around $54 has stopped price declines on two earlier occasions. If you’re interested in a currency-hedged international bond play, check out Vanguard Total International Bond (BNDX), a $30.6 billion ETF, up 1.7% in January. BNDX owns a mixture of corporate and sovereign debt.

 ♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog. ♦

Still alive and kicking

Last year a number of analysts sounded the death knell for the bond market. The chorus grew louder in mid-December when the Federal Reserve announced it would begin scaling back its stimulus program in January. Prevailing wisdom said that since the Fed’s $85 billion monthly bond-buying program has kept interest rates artificially low, bonds would soon come under downside pressure given the inverse relationship between interest rates and bond prices. Funny, someone forgot to tell the bond market.

Take a look at the year-to-date charts above representing US bonds, US high yield bonds, US municipal bonds and (for good measure) international bonds. My proxies for these markets are  iShares Core Total US Bond Market ETF (AGG), iShares iBoxx $ High Yield Corporate Bd (HYG), iShares National AMT-Free Muni Bond (MUB) and SPDR Barclays International Treasury Bd (BWX).  Through February 27 these exchange-traded funds have increased 2.0%, 2.6%, 3.4% and 2.3%, respectively, and are up 3.0%, 7.7%, 6.5% and 3.8% over the past six months.

I don’t disagree that the 32-year old bull market in Treasury bonds is long in tooth. Looking back at 200 years of data on interest rates in the US, bond bull markets historically run 22-37 years. But I also know from studying the past that bond markets roll over very slowly – it can take 2 to 14 years to change trend. Bottom line: Low rates can last for a long time. Take the guesswork out of the investment process and let charts guide your decisions. My newsletter provides intermediate-trend buy and sell signals for the bond markets shown above.

♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog. 

Strong showing, relatively

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click to enlarge

The specter of rising interest rates has taken a toll on the bond market in 2013, but demand for high yield bond funds remains elevated as investors continue to look for an alternative to low-yielding Treasuries and volatile stocks. In fact, sales of individual high yield bonds are on pace to surpass 2012’s record. So far this year iShares Boxx High Yield Corporate Bond (HYG), a $15.5 billion ETF,  has climbed nearly 6% in a period where investment grade bond funds, tax-free bond funds and international bond funds have come under pressure and are sitting on losses.

High yield bond funds owe their resilience year-to-date to a low level of interest rate sensitivity.  A study conducted in the mid-2000s attempted to quantify this characteristic and found that only 3% of a high yield bond’s price variation could be explained by interest rates while 24% of price movement was influenced by the direction of equity markets. In other words, high yield bonds actually behave more like stocks than bonds. In May I blogged about a recent Barclays study that looked at periods when 10-year Treasury yields rose 100 basis points or more. Barclays found there had been 13 such times in the past 30 years and that high yield bonds outperformed investment grade bonds 12 times.

I’ve managed a High Yield Bond Portfolio for over 20 years for clients interested in leveraging the high yield bond market’s unique performance characteristics to diversify their portfolios. I move their investments to US Treasuries or cash when high yield bond risk is elevated. Between 1992 and 2012 the program’s returned 8.5% annually compounded, after fees, with only small losses along the way. If you’re interested in trading high yield bonds yourself, check out my newsletter – I supply general buy/sell signals for US high yield bond funds, along with a weekly list of top monitored funds/ETFs based on price momentum.

♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog.