We have witnessed a real recovery for Treasury prices, sending the yields lower. The 10-Year Treasury note is yielding 1.95% today, down from about 1.99% on Monday and down from 2.06% last week. The 30-year Treasury long bond has not seen its yield come in as much, but it is down. The long bond’s yield of 3.20% compares to 3.22% on Monday and about 3.27% last week. This has yet again driven up the demand and price for bond exchange traded funds (ETFs) as investors seek safety outside of Europe.

The Vanguard Total Bond Market ETF (NYSEMKT: BND) is up 12 cents to $83.49, versus a low price of $83.02 just last Monday. Its yield screens out at almost 2.7%, and it tracks the Barclays Capital U.S. Aggregate Float Adjusted Index.

iShares Barclays 20+ Year Treasury Bond (NYSEMKT: TLT) is even more liquid, and it is up 0.56 at $117.20. That is higher than the low price of $114.75 back on March 8. It yields about 2.72%, but we would caution that this would have to rise more than 10% in price before hitting a 52-week high.

iShares iBoxx Investment Grade Corporate Bond (NYSEMKT: LQD) ETF tracks the “investment grade corporate bond market” via the Markit iBoxx USD Liquid Investment Grade Index. It is up $0.24 to $119.73 and yields 3.8%. The low close here was $118.78, back on March 8.

iShares iBoxx High Yield Corporate Bond (NYSEMKT: HYG) ETF tracks the junk bond market and yields a much higher 6.57%. This one took a hit on Monday due to junk bonds having “risk asset” characteristics, but now it is back to being within a half percent of its 52-week high.

Note that there has been a significant volume spike in the WisdomTree Europe Hedged Equity (NYSEMKT: HEDJ) ETF, but this is usually too thin to track for us. Average volume is not quite 16,000 shares, but this has traded more than 2 million shares alone today. The price is down $0.18 at $50.47, and this represents some $100 million worth of a transaction. Investors can track the WisdomTree DEFA International Hedged Equity Index to see its return.

One interesting take is that the iShares S&P National AMT-Free Muni Bond (NYSEMKT: MUB) ETF has not seen demand increase, as it has been a hard month for municipal bonds. Shares are down four cents at $109.77 so far on Tuesday, and the price is even lower than it was on Friday. Its yield is 2.83%.

Even the CurrencyShares Euro Trust (NYSEMKT: FXE) exchange traded product is putting in yet another low as the euro hit a low not seen since late in 2012. That is down $0.45 at $127.80, versus a close of $129.54 last Friday.

Cyprus is insignificant to the world, but the implications of the eurozone pushing for a nation to steal money from bank depositors has many ugly possibilities. The flight to safety trade still remains. At some point we will all get to worry again about what is happening here rather than in tiny island nations that have little relevance as far as the broad global economy is concerned.

The Treasury market has rallied for almost 30 years. Yields have ranged from Paul Volcker highs of more than 16% on the long bond and Fed funds at 21.5% to lows of 2.45% on the long bond and .18 basis points on Fed funds back in July of this year. Selling off back to the 16% level is all but impossible, but a move back up to a 4%, 5%, 6% or even 7% yield in Treasury notes and bonds is not out of the question. Again, the vexing question is when?

We asked when a month ago. Now we are asking whether it already has begun. On the day our story first appeared, the yield on the 30-year Treasury bond (TYX) closed at a 2.78%. Friday the yield hit an intraday high of 3.17%, a 14% increase, before finally closing at a 3.11%. That is a dramatic yield move in the bond markets.

Goldman Sachs Group Inc. (NYSE: GS) already is calling for higher Treasury yields, on top of the yield rise we have seen in recent days and weeks. With the 10-year yield around 1.935% now, the bulge-bracket firm and primary dealer sees the 10-year Treasury yield rising up to 2.00% to 2.25% in the near term. The question that must remain in the back of investors’ minds is whether this time really will be different. If the DJIA does rise more than 11% to our 14,590 peak target of 2013, will bonds still be as attractive? Very likely that answer is no.

So how does one put the trade on? Buying intermediate-dated TIPS, or Treasury inflation-protected securities, may be one idea. The logic is that rising interest rates will portend rising inflation, which will increase the value of the bonds. This may be the safest way to play the trade, especially owning TIPS that mature in 2019 or later.

Shorting the actual bonds, or an ETF like the iShares Barclays 20 Year+ Treasury (NYSEMKT: TLT) or Vanguard Long-Term Government Bond Index (NASDAQ: VGLT), may make sense. But when you are short bonds or interest-paying ETFs, you are responsible for paying the interest on the carry. This is in addition to the stock or bond loan cost. Short of a world disaster, the 2.45% low last July may very well be the bottom. But if this proves to be a head fake, the carry and loan cost could become expensive.

You can also purchase the leveraged short Treasury ETF, PROSHARES Ultrashort 20+ Treasury (NYSEMKT: TBT). While it certainly will provide you upside in a sustained Treasury sell-off, it has proven to be an inefficient vehicle that does not always accurately track rising yields.

One option strategy to consider is selling short the 55 strike TBT puts that expire in January of 2015 for $5.10 a contract and take in the cash proceeds. Each contract you sell will bring in $510 less commission. You are agreeing to buy the stock in January of 2015 or earlier at $55 per share, which is almost 18% below Friday’s price of $66.91. You can either keep your cash proceeds and hope the contract expires worthless or cover by buying the puts back if TBT trades higher. You also could use your proceeds to buy the TBT January 2015 90 strike call options at $5.10. Here you literally have two trades on the short. There is no cost to you except commissions, but you have to be willing to buy the stock if it trades at or below the 55 strike.

Shorting puts is a very aggressive strategy. It is not recommended for conservative investors or those unfamiliar with the option and derivative markets. However it may provide you with the most leverage to the trade at a cost lower than shorting actual ETFs or bonds. The risk-reward here is substantial, with the 30-year Treasury yield at less than half its long-term historical level. It may seem like a dangerous trade, but so was shorting the subprime market when real estate was booming.

Lee Jackson

Goldman Sachs Group Inc. (NYSE: GS) is already calling for higher Treasury yields on top of the yield rise we have seen in recent days and weeks. With the 10-year yield around 1.935% now, the bulge-bracket firm and primary dealer sees the 10-year Treasury yield rising up to 2.00% to 2.25% in the near-term. The question that has to remain in the back of investors’ minds is whether or not THIS TIME really will be different. If the DJIA really rises more than 11% to our 14,590 peak target of 2013 will bonds still be as attractive? Very likely that answer is no.

Time after time we have seen large “generational high calls” in bond prices, meaning that bond yields supposedly cannot go any lower. That assumes that the economy does not roll back over into recession and that the rest of the globe does not drag the U.S. down with it.

All you have to do is to look at the yield curve below. Long-term rates are not just on the rise. They have been rising handily. The rise in rates will come with a sting for long-term bond holders. A two basis-point rise in the two-year Treasury will not really hurt any investor’s portfolio. What about a rise of closer to 40 basis points in the 10-year and 30-year Treasuries? Bonds are supposed to be safe but investors are not going to like it when their statements show big losses in their long-term bonds.

The most recent rise in rates has been adding to the value of the battered ProShares UltraShort 20+ Year Treasury (NYSEMKT: TBT). This has driven its price up to $67.30 versus a 52-week range of $56.32 to $86.20. The value of this “leveraged short fund” has risen 10% in just the last month. On the other hand, the iShares Barclays 20+ Year Treasury Bond (NYSEMKT: TLT) has tanked in price: at $117.45, its 52-week range is $109.69 to $132.21 and its implied yield based on the last payout was put around 2.7%.

With mortgages and funds tied to them having such a focus on how low long-term rates can remain, we would note that Market Vectors Mortgage REIT ETF (NYSEMKT: MORT) has actually withstood the rise in rates rather well.

Even the SPDR Barclays High Yield Bond (NYSEMKT: JNK) has held up well despite being a junk bond ETF. This has held up due to the underlying equity components holding up as well as S&P has shown that the “speculative grade composite spread” has narrowed down to 565 basis points. Some junk bonds are now trading with yields as low as the 5% mark. While the junk bond spreads have actually been tighter, they were up above 600 basis points just at the start of December.

It does not end there. Higher long-term rates mean higher mortgage rates. Higher and higher mortgage rates historically have been a drag on the housing market, which is currently still expected to remain in a fragile recovery. If the housing recovery stalls all over again, will that pressure an already-fragile broader economic recovery in the U.S. as many market historians worry? SPDR S&P Homebuilders (NYSEMKT: XHB) trades close to its multi-year high and its shares are up over 50% from the lows of 2012.

If you still have not noticed the very recent rise in rates, you better take a look. The 30-year Treasury is now at a yield not seen since a very brief spike in September of 2012 but they are now in position to challenge the rate pop going back to before last summer. Over the last month rates have risen 34 basis points in the 10-year Treasury Note and they have risen 37 basis points in the 30-year Long Bond. Here is a chart from Yahoo! Finance showing the rise in rates in just the last month:

The rising long-term Treasury yields might be a game-changer. The burning question remains just how different things may be this time around now that the fiscal cliff has been partially averted. The debt-ceiling fight continues. Stay tuned.

To be short the subprime market you had to be long the credit default swap (CDS) market. Essentially being long the “insurance” that was being sold. But like any insurance policy, that requires payment of the CDS “fee,” or spread to the issuer. Many people recognized the bubble, but too soon, a few as early as late 2005 and early 2006. Some got pushed out of the trade when the cost to carry overran their ability to fund. Which brings us to the biggest trade since the subprime short — the U.S. Treasury bond short.

Sure everybody can see it. The Treasury market has rallied for almost 30 years. Pushing yields from Paul Volcker highs of 16%+ on the long bond and Fed funds at 21.5% to lows of 2.45% on the long bond and 0.18 basis points on Fed funds back in July of this year. Selling off back to the 16% level is all but impossible. But a move back up to a 4%, 5%, 6% or even 7% yield in Treasury notes and bonds is not out of the question at all. Again, the vexing question is when.

The Federal Reserve, led by Chairman Ben Bernanke, has said they will keep rates low until as late as 2015. That may be more of a threat than a promise. So how does one put the trade on? Buying intermediate-dated Treasury inflation protected securities (TIPS) may be one idea. The logic is that rising interest rates will portend rising inflation, which will increase the value of the bonds. This may be the safest way to play the trade, especially owning TIPS that mature in 2019 or later.

But shorting the actual bonds, or an ETF like iShares Barclays 20+ Year Treasury Bond (NYSEMKT: TLT) or Vanguard Long-Term Government Bond Index (NASDAQ: VGLT), may prove to be very painful. Short of a world disaster, the 2.45% low last July may very well be the bottom. But going sideways for two years could prove a costly carry, like the one experienced by owners of subprime CDSs in 2005 to 2007.

You can also purchase the ProShares UltraShort 20+ Year Treasury (NYSEMKT: TBT), but it has proven to be an inefficient vehicle that does not accurately track rising yields. Lastly, there is a risky way to trade the short Treasury ETF that may very well afford a profitable end. You sell short the 45 strike TBT puts that expire in January of 2015 and take in the cash proceeds. Then you give yourself a window for success, you do not have to pay the carry of actually shorting the bonds, and you are more than 20% below the current TBT price of $59.97. It is a daring play, and the TBT could get put to you, but so was shorting the subprime market when real estate seemed to be booming.

The bond guru, Bill Gross of PIMCO, has warned that the outperforming nature of bonds may have run its course. Other investors have talked about the great bull bond market rally being over as well. Stay tuned, the next big short is a trade that likely will not occur overnight and we will be offering more strategies and specifics along the way.

Lee W. Jackson

We saw that the 30-year yield was already at the highest yield in about a month and a half and that was before the auction.  While this 30-year yield is still extremely low, it is important to know that the bottoming out in yields (highest in face value, of course) was roughly 2.45% back on July 25.  In short, the rise in rates was nearly 40 basis points from trough to peak in the auction and that is a rapid rise in rates.

It was just back on July 27 that we signaled the rapid rise in rates beginning to take place.  That was ahead of the FOMC meeting and ahead of the better than expected Payrolls data released last week.

The 30-Year Long Bond has hit a multi-week high yield as the appetite for risk has come back into play since the dog days of June.

We would note that the prices on the The price on the iShares Barclays 20+ Year Treasury Bond (NYSEMKT: TLT) was down 0.7% at $124.31 and the ProShares UltraShort 20+ Year Treasury (NYSEMKT: TBT) was up 1.3% at $15.76 right before the auction results were released.

JON C. OGG

• The 2 Year yield is 0.24%, up 1 basis point from yesterday. The yield last week was 0.20%.
• The 3 Year yield is 0.33%, up 3 basis points from yesterday. The yield last week was 0.28%.
• The 5 Year yield is 0.64%, up 6 basis points from yesterday. The yield last week was 0.57%.
• The 10 Year yield is 1.51%, up 7 basis points from yesterday. The yield last week was 1.46%.
• The 30 Year yield on the Long Bond is 2.58%, and that is up 8 basis points from yesterday. The yield last week was 2.54%.

Is this the beginning of the end for bonds?  Probably not.  The headlines from Europe are likely to remain more negative than positive. Still, we are on a day-two stock rally and the DJIA is up over 100 points and within spitting distance of 13,000 (12,992).  The S&P 500 Index (NYSEMKT: DIA) is up 14.6 points at 1,374.60 so far today.

The PIMCO Total Return ETF (NYSEMKT: BOND) is down -0.3% at $107.13 so far today.

JON C. OGG

The prior ‘on-the-run” 10-Year was trading at 1.51% or so today, but the new auction went off at an amazing 1.459%.  The bid-to-cover ratio was extremely high all the way up at 3.61% versus an average of 3.07 for 10-Year Treasuries.  Another key metric was indirect 40.6% and direct bids were over 45%, which is the highest direct bidding we have seen.

Keep in mind that the previous 10-Year Treasury auction went off at about 1.62% with a bid-to-cover ratio of only 3.06 at the time.  This is fear of a global recession driving interest in U.S. Treasury debt.  The good news is that you can qualify for a housing mortgage then you are likely looking at record-low rates on 15-year and 30-year mortgages.

The iShares Barclays 20+ Year Treasury Bond (NYSEMKT: TLT) exchange-traded product is now up 0.23% at $128.74 on the news.  Also the iShares Barclays 7-10 Year Treasury (NYSEMKT: IEF) exchange-traded product is up by $0.07 at $109.09.  Even the PIMCO Total Return ETF (NYSEMKT: BOND) ticked back up and is trading up $0.07 at $106.53.

JON C. OGG

What has changed in the last two weeks is Europe.  Two weeks ago it was not expected that France was going to suddenly issue a citizen-wide veto of the austerity measures.  Now that Sarkozy has effectively lost to Hollande in French elections, France is taking a socialist step and is effectively boycotting its austerity measures.

The move in France followed an inability for the Dutch to reach a budgetary agreement, and now we have Spain back in trouble.  To add insult to injury, the new Greek politicos are just wanting to break the agreed-to austerity measures that allowed it to avoid default (as if you should be surprised there!).  Now we have Ireland even calling anti-austerity sounds with an implied return of Sinn Fein in the public.

So, back to bonds… The 10-Year Treasury Note is now yielding 1.81%.  If you go back and review the charts, the 1.80% acted as a yield floor in February of 2012 and in December of 2011.  In September and October of 2011 the floor was closer to 1.70% as an absolute low, but when that came off the 10-year note yield rose 30 basis points in just over a week. The 10-Year note was yielding 2.20% as recently as April 5, 2012 and had risen to 2.40% as recently as March 20, 2012 (after having risen 40 basis points in just 9 trading sessions).

Now we have a 30-Year Treasury “Long Bond” yield back at almost 3%.  For the “Long Bond” yields to be back at the real lows it has to drop to about 2.90% and ultimately about 2.80% as the floor in September, October, and again in December of 2012. The 30-Year yield was at 3.40% as recently as April 4, 2012.

Credit Suisse just lowered its S&P 500 target to 1,450 from 1,470 this morning and it has increased the odds that both Greece leaves the Euro and also that the Euro could dissolve entirely.

iShares Barclays 20+ Year Treasury Bond (AMEX: TLT) has risen almost $10.00 per share since March 20, 2012 and that shows just how much interest has been there from what are normally equity investors who are preferring to Buy exchange-traded Treasury debt products.  Its yield is currently about 2.85%.

Junk bonds have lost their luster again, and it was only a week or so ago that the index was hitting a new high.  SPDR Barclays Capital High Yield Bond (AMEX: JNK) recently peaked above $40.00 and it is now at $39.50.  Investors have also turned away from the high-payout MLP sector as the JPMorgan Alerian MLP Index ETN (AMEX: AMJ) product recently peaked at almost $42.00 and it is now under $38.70 despite what is a high ‘yield equivalent’ for investors.

The banking sector surged in the first quarter but it has pulled back substantially.  The Financial Select Sector SPDR (AMEX: XLF) peaked at $16.20 and it is now down at almost $14.90 for what is getting closer to a 10% correction.  The highly volatile and leveraged Direxion Daily Financial Bull 3X Shares (AMEX: FAS) peaked around $110.00 per share at the end of March and start of April and it is now challenging the $94.00 price.  Banks and financials are back out of favor, mostly due to fears about Europe dragging them down.

The real question is whether or not this is the signal of the next recession or whether this is a trade for the “Sell in May and go away!” theme that investors are more worried about.  All growth indicators from non-farm payrolls, purchasing managers, and manufacturing and services activity readings are pointing so far to what is just slower and slower growth.

In the United States, Q1-2012 GDP was up at only +2.2% as government spending was down by 3% in the quarter.  Europe is in all but a deep ‘official recession’ per most of its latest economic reports.  The growth in China and Brazil has seen a tempering throughout this year as well, with other key emerging markets like India and others in South America still seeing slower and slower growth.

The good news against the recession argument is that economists after the last earnings season still seem to be calling for positive growth in U.S. GDP in the second quarter at least as of now.  If that holds true and if the U.S. can avoid getting pulled down by Europe, then perhaps the U.S. will avoid an official recession even if this current growth is rather pathetic.  We also have an election and it is a near certainty that both Presidential candidates are likely going to say whatever they can get away with to win the election in November.

If Q2 does not show negative on the GDP front in the United States, then technically no recession can be declared until early in 2013.  That would coincide with what Ben Bernanke has warned about the financial cliff facing the United States at the end of 2012 and it is when the new tax structure takes place.

The market is definitely voicing concern here.  Is that a recession warning?  It depends upon your own outlook and upon your own interpretations.  It must also be noted that the current drop in stock prices is getting to be where stocks are getting close to ‘oversold’ on the short-term charts even if the fundamentals are of concern.

As a final reminder, stop kidding yourself about the notion of a double dip recession.  We have enjoyed close to three-years of positive economic growth.  If a recession comes again soon, it will just be ‘the next recession’ since a double dip recession has to occur with a couple or a few quarters of the prior recession.

JON C. OGG

The Institute for Supply Management has issued its reading for January non-manufacturing and the data is strong.  Very strong.  At 56.8, this is the best reading in almost a year.  Dow Jones was only calling for a reading of 53.1.

The business index was 59.5 versus 55.9 in December.  Employment showed the biggest gain to 57.4 from a prior December reading of 49.8 and prices rose only to 63.5 from 62.0 in December.  Even new order picked up to 59.4 from 54.6 in December.

The news this morning, particularly after the stellar jobs numbers, is really hurting longer-dated Treasury prices and driving yields higher.  The Fed Funds Futures are signaling a much quicker rate hike scenario than just a week ago.

The iShares Barclays 20 Year Treasury (NYSE: TLT) tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index and its price is down 2.3% at $116.39. The ProShares UltraShort Lehman 20+ (NYSE: TBT), which is double inverse the price action (intraday) is up a whopping 4.6% at $19.32 on the day.

JON C. OGG

This morning is showing a 4.44% yield in the Treasury’s 30-Year long-bond.  While that yield hit 4.46% Friday and briefly appears to have challenged 4.50% earlier last week, we have to go back to the end of May to see the same yields on the CMT.

The Fed is said to be buying Treasuries out six to seven years on the curve, and this action is expected to start ahead of tomorrow’s FOMC meeting.  A headline late Friday noted about $110 billion was the indicated amount of Treasury purchase for the month ahead.  Whether that is the case or not is another matter.

ProShares UltraShort 20+ Year Treasury (NYSE: TBT) ETF is up 0.2% pre-market at $38.28 and its 52-week range is $29.77 to $51.21.  That one will see its price rise if Treasuries fall and their yields rise.  iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) is there for those who believe bond prices will rise.

JON C. OGG