Banking & Finance

Treasuries Brace for 3-Percent 10-Year and 4-Percent 30-Year Yields

It is no secret now that interest rates have risen. Long-term Treasury yields and even intermediate Treasury yields are now perhaps even starting to normalize even with Ben Bernanke and the Federal Reserve keeping Fed Funds down at the 0.00% to 0.25% target rate. The problem that is going to startle longer-term bond investors is that the 10-year Treasury Note is getting closer and closer to 3% and the 30-year Treasury Bond is getting closer to 4%. We are seeing that the iShares Barclays 20+ Year Treasury Bond (NYSEMKT: TLT) and the ProShares UltraShort 20+ Year Treasury (NYSEMKT: TBT) are also starting to reach critical levels.

The question to ask is what happens when investors who own 10-year to 30-year noted and bonds realize that they have lost 5% to 10% (or slightly more) in their bond portfolios. Investors flocked to bonds as a safety net because stocks were too volatile, yet stocks have more than doubled off their lows and suddenly they are finding out that bonds come with risk too.

Monday brought on a rather dismal notion in rates. The 10-Year Treasury yield hit a high of 2.88% on Monday. The prior stop had been around 2.70%. On May 1 this yield was as lows at 1.61%, so now we have seen interest rates rise more than 1.25%. Keep in mind that the lowest 10-year yields of about 1.40% in July 2012 have now doubled.

The 30-year Treasury yield of 3.88% is up from a recent low of 2.81% at the start of May. The lowest yield back in 2012 was 2.45%. Now rates appear to be challenging 4%, which will have peeled off close to 15% of the face value of any Long Bond buyer who purchased when yields were at the lows.

If you do not believe that rates are killing bond values in retirement and investing portfolios, take a look. The iShares Barclays 20+ Year Treasury Bond (NYSEMKT: TLT) ETF hit a 52-week low of $102.49 on Monday. Its yield is 2.87%, but the 52-week high is $127.72. On May 1 that price was $123.12, so this ETF has lost almost 17% f its value in just over 100 days.

If you want the inverse of this, the inversely correlated and leveraged ProShares UltraShort 20+ Year Treasury (NYSEMKT: TBT) ETF hit a new 52-week high of $82.45 against a 52-week low of $58.23. The exchange-traded product closed at $58.49 on May 1. Because its price rises with yields and with all of the leverage, this exchange-traded product is up literally 40% since just the start of May.

What is happening is that the markets continue to brace for a tapering of the $85 billion per month in mortgage-backed securities and Treasury bonds by the Federal Reserve. It is interesting that this sell-off is coming at a time with very low participation in August and now that stocks have sold off for two weeks.

If you have been around through various interest rate cycles, you know that rates do not rise only over a very short period of time. Rates rise rapidly, and of course they ALWAYS rise too far. The problem that bond investors have to worry about is not just that the 10-year wants to challenge 3% and the 30-year wants to challenge 4%. The real worry is that the bear market in bonds is barely three months old, and of course mortgage rates are now up 100 basis points or more as well.

Some good news is possible. Municipal bonds are getting very cheap, ditto for junk bonds. REITs and high-yield bonds have been getting slammed as well. This will create some serious value for investors who can take a long-term opportunistic approach, but that opportunity may still be a ways off.

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