For months if not years, market bears have contended that the rise in bonds shows that investors are still not convinced of stocks. Historically, rising bonds has signaled a market decline to come but the playing field has changed dramatically. When bonds rise, bond yields (or interest rates) fall. Ben Bernanke and the Fed are determined to keep interest rates low in order to assist in a housing and therefore an economic recovery.
The recent rise in bond yields shows that investors are convinced this market rally is here to stay and are pulling money out of bonds to put into stocks. Can this rise in bond yields last with the Fed determined to keep rates low? The answer is absolutely not. But a chance that bond yields fall is not a bearish thing for the market like it has been over the last decades.
The reason is that the Fed will combat rising rates with further quantitative easing or QE3. This will in turn drive bonds yields lower and continue to give stocks reason to rise. Lets take a look at the yields below. The recent downtrend was broken this month and a rally continues.
One way to see that the rally is likely to continue is by looking at the performance of yields versus stocks. With the break in the downtrend of yields, yields have started to outperform stocks giving credence to the argument that yields will continue to rise. The yellow highlighted area represents the potential resistance area for bonds and the point the Fed is likely to step in at and issue QE3.
To take advantage of the rise in yields, the etf, TBT can be bought. At the point where yields start to turn lower, it can be played with the etf, TLT.
Since we can never be sure of the Fed's timing due to their increased visibility, I'd prefer to wait until yields rise further and then play them lower with TLT. Those who are much more bullish on stocks and yields than I can use the TBT to capture the profits that come with rising yields.