Bond Investors: Bonds May Collapse Before Bernanke’s 2014 Target (TBT, TLT, SHY, IEF, TBF)

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February 7, 2012 12:36am NYSE:SHY NYSE:TBF

Jason Cimpl: The yield on U.S. bonds is abysmal. While I realize that I don’t need to tell retirees something they already know, such a low interest rate is a crisis that faces many American citizens.

With bond yields this low how are the elderly supposed to supplement social security, pay rising healthcare costs or protect their financial nest egg?

Last month, the Fed decided to keep interest rates near zero again. The zero-interest rate policy, also known as ZIRP, was no surprise, but the expected length of the program was updated. And the new Fed schedule revealed that Ben Bernanke and the FOMC expects to keep interest rates near zero until 2014.

Yields on bonds have been pathetic for over four years and the Fed wants yields to stay low for another two years too. Ben Bernanke and the Fed manipulated the yield of bonds to spur U.S. GDP growth. But the side effect of that policy was that safe investments now yield nearly zero return for investors. Ben Bernanke has once again managed to penalize responsible savers.

After Ben Bernanke announced he would likely target zero-interest rates until 2014 bond yields collapsed. And it created two opportunities for a trade.

First, is that yields will continue to compress as the Fed eats up bonds from the banks and fakes demand for Treasuries. The correct way to trade this trend is buy iShares Barclays 20 Year ETF (NYSEArca:TLT).

Second, is that failed Fed and government stimulus policy has put America in a rough mode of recovery. Compounded with the sluggish growth prospect for the economy is a ballooning U.S. deficit. At some point not even the Fed will be able to keep rates low and investors will demand a premium. Once that inevitable day occurs you must purchase the ProShares Ultra Short Lehman 20 ETF (NYSEArca:TBT).

But how long before that day of reckoning unfolds? And when will TLT stop rising? This video analyzes the move of U.S. bonds over the past few years and also shows where I think prices are headed in the long and the short term.

Get the latest Flash Player to watch this video.

Related: ProShares UltraShort 20+ Year Treasury ETF (NYSEArca:TBT),  iShares Barclays 7-10 Year Treasury Bond Fund (NYSEArca:IEF), ProShares  Short 20+ Year Treasury ETF (NYSEArca:TBF), iShares Barclays 20+ Year Treas Bond ETF (NYSEArca:TLT), Barclays 1-3 Year Treasury Bond ETF (NYSEArca:SHY).

Written By Jason Cimpl From Wyatt Investment Research

Wyatt Investment Research is led by founder Ian Wyatt, who serves as Publisher and Chief Investment Strategist. Our team also includes a group of talented research analysts and editors who aim to uncover great investments and present those investment ideas to our growing group of loyal subscribers.

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