In actuality, I was surprised that there were only 37 names on the bearish list. What jumped out was that of the 37 names on the list, there were three prominent bond ETFs on there.
The iShares Barclays Aggregate Bond Fund (NYSEARCA:AGG), the Vanguard Total Bond Market Fund (NYSEARCA:BND) and the iShares Barclays 20+ Year Treasury Bond Fund (NYSEARCA:TLT) all appeared on the bearish scan. With all of the attention being paid to interest rates in the past month, seeing three prominent bond ETFs on the list was a little surprising.
The market has been more volatile over the last four or five weeks because investors are worried about the Fed hiking interest rates. When the Fed met last week and lowered its outlook on the economy, some investors felt that was a good sign that a rate hike wasn’t going to happen as soon as everyone thought. This sent stocks and bonds higher.
What you have to remember about bonds and bond ETFs is that the price rises if interest rates are falling. If interest rates are rising, the price of the bonds and the price of the ETFs should be falling.
Of the three bond ETFs that appeared on the bearish list, the iShares Barclays 20+ Year Treasury Bond Fund (TLT) is the best opportunity in my opinion. While the AGG and BND have moved up nicely and are overbought, I don’t think there is enough movement to take full advantage of a rising interest rate environment.
The TLT rose sharply throughout 2014, with the price jumping over 27% during the year. The fund peaked at $137.95 in January and then slipped throughout February and the early part of March.
From March 6 through Tuesday, the TLT recovered nicely, but it also became overbought on the daily chart. The high reached on Wednesday was only $132.76 before the fund dropped. When we combine the high from January with the high from Wednesday, I believe we get what will act as a new trendline that will dictate trading for the coming months.
With the Fed wanting to raise interest rates, I can’t see bonds moving higher in 2015. Granted, the Fed only controls the Fed Funds rate, but they can also influence bonds and notes with their open market actions.
The old saying that “you can’t fight the Fed” is usually thought of in terms of stocks moving higher when the Fed is easing rates. It also applies to bonds when the Fed is tightening monetary policy.
There are a couple of ways you could take advantage of rising rates and falling bond prices.
You could sell the TLT short or buy puts on it, or you could buy the inverse ETF of the TLT. The ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) moves counter to the TLT. If bonds are falling, the TBT should be rising. The TBT is currently trading in the $42-$42.50 range. I can see it moving back above the $50 level within the next three or four months.
This article is brought to you courtesy of Rick Pendergraft from Wyatt Research.