Mostly fueled by the Fed’s quantitative easing policies and its subsequent indirect infusion of cash into the global markets, the equity and commodity markets have been rallying since March of 2009. And last week most of the financial media focused on the fact that the stock market made new highs for the year and hit the highest level since before the crash of 2008. I must say that it was indeed impressive. However, I don’t believe that was the week’s most significant event …
If you follow the markets closely like I do, I believe that the 10- and 30-year Treasury yields breaking out to the upside for the first time in months deserved a lot more attention that it received.
Touting recent economic strength, this breakout was in reaction to the Fed announcement that there was little chance for additional quantitative easing, while at the same time despite rising oil prices, they don’t see inflation as a risk at this point, signaling there is little chance of tightening of economic policy.
If you are paying close attention, you’ll realize that this change in stance is a significant one. In fact, it lead one Wall Street investment bank to declare the 30-year bond bull market to be officially over. So if you agree with the bank’s conclusion, you can now see a shift pushing bond yields higher. As a result, it will have incredible implications for many investments.
As a result, I believe that there are some incredible opportunities in Treasury yields once they start to rise. And despite Bernanke’s promise to not officially “raise rates til 2014”, if you take a look…they are already starting to rise!
Although we do not give any financial advice, here are three immediate opportunities to explore on your own and give consideration …
♦ 1) The most obvious for professional investors, is to simply short the 10- or 30-year Treasury bond through the futures markets. This, however, requires that you’re an experienced trader who is very comfortable trading futures and you must have a futures account, something most individual investors don’t have.
♦ 2) The second option is trading with ETFs. There are many ETFs that genially provide essentially the same exposure as futures, but this financial instrument also requires professional experience, especially when investing through the use of inverse ETFs. Many people try to short yields via TBT, which is the ProShares UltraShort 20+ Year Treasury. This is a leveraged ETF which means it rises 2 percent for each 1 percent drop in long-term Treasuries. You need to keep in mind that as with all leveraged ETFs, TBT is going to have a decent amount of “slippage” over the long term versus the underlying asset (in this case Treasury bonds). As a general result, I don’t think leveraged ETFs are good long-term investments. However, if yields move much higher from here, TBT could pay off handsomely. But it’s a gamble. An alternative option you may consider that will suffer a bit less from slippage and could be a better longer term holding is ProShares Short 20+ Year Treasury (TBF) — it’s the non-leveraged version of TBT.
♦ 3) The third way you can get “long” Treasury yields is by taking on all the debt you think you’ll need for the next couple of years. Locking in rates now, at historic lows, is a great way to effectively get long yields. This is true because all your assets should begin earning more as yields rise. In the meantime, you’ll continue paying lower interest rates on the money you’ve borrowed. Most importantly, using “cheap money” by “locking in long term low interest rates” now will allow you the opportunity to hedge against rising inflation via hard asset/real estate acquisitions, thus preserving your wealth over the long-term.
Remember, the traditional way to grow and preserve wealth is to realistically try to calculate the probability of what is coming in the future, and responsibly prepare and invest alongside the trend. People who loose their shirts are those who enter the markets too late, or react once they are convinced of a trend. Nobody can predict the future, but there is a distinct difference between “possibilities” and “probabilities”.
The probability that era of lower rates looks like it’s coming to an end …and like many bubbles before it (Internet bubble, housing bubble, etc) this bond bubble is about the burst.
We will probably never see rates this low again in our lifetime. And this era is not ending tomorrow or next week or next month. But there is no doubt whatsoever in my mind that the tide has changed. And if you take advantage of this shift in rates and seize the opportunity, you’re bound to reap substantial rewards now.
One of the best ways to “lock in low rates” is to acquire hard assets today at these low rates to hedge against the future. Yes, I do acknowledge that not all real estate will retain and appreciate in value over time; but the last time I checked, God isn’t creating any more “islands” anymore. Water-view, beach and island property all over the globe is already on the ascending rise, and the South Jersey shore is demonstrating the same trends. As a result, this might be the ideal time to finally pull that trigger on the beach home you have been wanting to buy, or collaborating with your family members or friends on a joint purchase of a shore duplex, or building your own Jersey Shore home to your own specifications. Income producing property, whether it via second home summer vacation rentals or commercial boardwalk real estate, is a sure bet against both a devaluing dollar, inflation, and rising interest rates. Lock them in now and get in at the bottom, instead of getting caught paying more later as everyone panics into the market with rising rates.
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