FIVE AND TEN YEAR BOND YIELDS EXCEED 200-DAY AVERAGE -- PROSHARES SHORT BOND ETFS CONTINUE TO CLIMB -- SO DO STEEL STOCKS WHICH PRESENT GOOD VALUE IN COMMODITY GROUP -- FUND MONEY FLEEING BONDS MOVES TO STOCKS AND COMMODITIES
EVEN THE FIVE-YEAR HAS TURNED UP ... A month ago (November 9) I showed the 30-Year T-Bond Yield (TYX) exceeding its 200-day moving average, and warned that carried bad news for the bond market. Chart 1 shows the TYX climbing to a new seven-month high. Earlier this month the 10-Year Treasury Note Yield (TNX) climbed over its 200-day line as well. Chart 2 shows that benchmark yield trading at a new six-month high. Chart 3 shows the 5-Year T-Note Yield (FXX) exceeding its 200-day line over the last week. Bond yields usually start climbing when bond investors sense economic recovery along with an increase in inflation pressures. Those inflation pressures are usually accompanied by rising commodity prices. The rise in bond yields usually starts with longer maturities and then spreads to shorter maturities. That's exactly what's happening now. While that's good news for the economy and the stock market, it's bad news for holders of bond mutual funds and Exchange Traded Funds. That's because bond prices fall as yields rise.
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Chart 1
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Chart 2
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Chart 3
RELATIVE BOND LOSSES ... Chart 4 compares losses in various bond ETFs since September 1. The hardest hit bond categories have been the long Treasury bond (-14%), munis (-7%), and ten year Treasury notes (-5%). [The TLT, MUB, and IEF have fallen below their 200-day averages] .Lesser losses took place in investment grade corporates (-3%) and TIPS (-1%). High yield corporates gained (+5%). My December 2 message suggested that high yield bonds would hold up best in a rising rate climate while long Treasuries would fall the hardest, but that all bond categories would underperform stocks. During those same three months, the S&P 500 has climbed 10% and the CRB Commodity Index has risen 21%. That's where most of the money coming out of bonds has been going. Stocks tied to commodities have been market leaders including precious metals (+15%), materials (+23%) and energy (+30%). We've also pointed out that economically sensitive stock groups (retailers, semiconductors, transports, and small caps) have been market leaders. All of these factors carry bad news for bond fund holders.
Chart 4
PROSHARES SHORT BOND ETFS KEEP CLIMBING ... Last Tuesday's message showed how ProShares short bond ETFs could be used to hedge long bond positions or to profit from falling bond prices. That's because these are inverse (or bear funds) that rise when bond prices fall. Charts 5 and 6 show the Short 20-Year and the Ultra short 20-Year ETFs exceeding their 200-day moving averages. Chart 7 shows the Ultra short 7-10 Year fund nearing its 200-day line. [Ultra short bond funds are designed to rise twice as fast as the corresponding bond ETF falls].
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Chart 5
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Chart 6
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Chart 7
MARKET VECTORS STEEL ETF TESTS APRIL HIGH ... Last Tuesday's message also suggested that steel stocks represented good value in the commodity area. I pointed out that the Market Vectors Steel ETF (SLX) was the only commodity-related stock ETF that has yet to clear its spring high. Chart 8 shows the SLV attempting to do that today. The SLX/S&P relative strength ratio (below chart) has just broken out to the highest level in nine months. I showed two US steel stocks that were just achieving bullish breakouts. Chart 9 shows US Steel Group (X) trading at a new seven month high. Chart 10 shows Nucor doing the same. Both have rising relative strength lines and are among the cheapest stocks in the commodity and steel groups. Bonds don't like economic growth and inflation. Stocks and commodities do. Draw your own conclusions.
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Chart 8
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Chart 9
