Did collapsing bond markets last November signal the end of the three decade-long bond bull market? Almost all bond ETFs peaked on or near November 4 of last year. Since then some (perhaps unexpected) trends have emerged.
ETFs are useful trend indicators. Since they are composed of dozens, even hundreds, of securities, individual security movements have little effect on price. Lets look at five ETFs to see what is happening.
iShares Aggregate Bond ETF (NYSEARCA:AGG): 3.63%
If you want investment-grade bonds, but don't want to delve into the intricacies of sectors, maturities, coupons etc., this ETF is for you. It holds a blend of over 700 securities -- mostly U.S. You get treasuries, mortgage backed securities, corporates bonds etc., all spread over a wide range of maturities (see here for detailed holdings). AGG has lost 4.1% since November 4.
iShares National Municipal Bonds (NYSEARCA:MUB): Yield 3.71%
On December 19 of last year, analyst Meredith Whitney predicted major muni defaults in 2011. This resulted in large outflows of funds from the muni market. The panic now seems to have subsided. -- munis have rallied over the last month. This ETF has over 1,100 securities with 66% rated AA or better (see here for detailed holdings). MUB has lost 5.7% since November 4.
iShares Investment Grade Corporate Bonds (NYSEARCA:LQD): Yield 4.76%
This ETF holds investment-grade, mostly U.S. corporate bonds on the lower end of investment grade -- 48% rated A and 28% rated BBB. Holdings are relatively long term -- 34% 7-10 year and 27% 20-30 year (see here for detailed holdings). Financials make up a large portion of securities. LQD has lost 4.8% since November 4.
iShares High Yield Corporate Bonds (NYSEARCA:HYG): Yield 7.69%
You can't keep this surging ETF down. After initial steep mid-November declines, it now matches or exceeds its early November high. HYG holds high-yield (a.k.a. junk) bonds -- 60% are rated B or lower (see here for detailed holdings). As of this writing, HYG is above its November 4 high.
iShares Emerging Market Bond Fund (NYSEARCA:EMB): Yield 5.22%
Surging inflation in emerging markets is leading to tightening. This is reflected in bonds as higher rates mean lower prices. In the last year many corporations have issued high-yield bonds, taking advantage of lower rates. Holdings are 77% foreign government issues, with an average rating of BBB and 10-year maturity (see here for detailed holdings). EMB has lost 8.4% since November 4.
Trends now are lower prices (rising rates) in emerging markets, and higher prices (falling rates) in U.S. high-yield markets. Others sectors (treasuries, investment-grade corporates, and munis) have shown price erosion approximating 4% over the last 14 weeks. Munis seem to be recovering from the Whitney scare at this point.
High-Yield Bonds: The Canary in the Coal Mine?
Watch the surging junk bond market and its spread over treasuries. As long as this market is strong, and the spread low, look for rising equity, commodity, and bond markets.
How long can Ben Bernanke keep interest rates on the worlds reserve currency down? QE2 failed to keep rates in check. If price erosion continues in bond markets, which seems to now be happening overseas, the pressure on the U.S. to raise rates will only increase -- but we are not there yet.
Watch HYG and junk bonds. When they start falling you will want to be mostly out of bonds and fixed income. I'm not sure where you will want to be then.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.