Just this past Wednesday, semi-official comments by a Federal Reserve Bank sometimes-spokesperson heightened perceptions that the Fed would indeed be "tapering off " its open-market purchases of (usually ) US Government (and sometimes federally-insured mortgage) bonds.
This not-so-joyous piece of apparent confirmation to widely speculated rumors (you know how the D.C. crowd works) was enough to cause market quotes on the long maturity US Government bonds to rise up to 3.92%, a hike of 8% in a week, and +10% from its level a month ago.
With bonds, their market value increases as yields decline, and their trade prices fall as interest rates increase. To illustrate:
(Bloomberg, last 2 years, daily)
For example, weren't you clever (or perhaps just lucky) to buy the Direxion Daily US Treasury 20+ Bull 3x Shares (TMF) in mid-March of 2012 when US Government 30-years yielded about 3 ½%? Because by some ten weeks later, June 1st, the Fed's open-market buying activities (QE) had driven the yield-to-maturity market rates down to 2 ¼% (upper right corner), and its price up from $53.44 to $88.88. A -35% drop in the rate produced a +66% gain on the bond ETF. Oh joy!
We should've sold the TMFs then, 'cause folks began to doubt the longer-term effectiveness of QE and bond prices started to back down. Despite renewed QE activity.
Here is an example of the relationship of the daily prices for the Direxion Daily 10 year version of the TMF (TYD) to the i-Shares Barclay 20-years (TLT) market quotes, the iShares Investment Grade Corporate Bond ETF (LQD), and the stock equivalent, SPDR S&P500 (SPY):
Now by June of this year, the bloom has come off this rose, and the market's inevitability is taking hold. The vaunted safety and security of US Government Bonds longer-term is being seriously questioned. It has dragged corporates down along with them, since the "risk-free" US Govvy rates form the "base rates" for the world's interest structure.
Especially since Libor's credibility has been seriously sullied.
Guess where the income-flight-capital has gone? There is no (not yet) productive "mattress" ETF, so besides corporate cash hoards (where in a government-influence-free environment their bonds should have shown strength), stocks have been the beneficiaries.
This latest market pop in interest rates to 3.9% put TMF prices back down under $42, less than half where they were at their peak. Since May the TYD is down -20%, TLT -14%, and LQD -10%. Stocks are up +10%. But bonds are a "safe" investment. Just not a profitable one.
Still want bonds to be 40% of a portfolio? The income "winter" is coming. Don't get left out in the cold.