Two months ago we wrote about the opportunity to lock in higher yields while you still can. Since then, our favorite yield generating investment is up a solid 4%. The window of opportunity to lock in higher treasury yields is still open … but this may be your last chance.
In the past eight months, yields on U.S. Treasuries have risen over 60% from a low of about 1.5% to over 2.4%. Current yields are hovering above the 30-year trend line, which has led to a lot of speculation about the end-of-the-bond bull market.
The 30-year decline in interest rates on T-Notes may indeed be finally coming to an end … but we’re not so sure.
Prices for interest-rate sensitive investments have definitely been hit hard by the recent rise in yields. A great example of that is the price of T-Notes in the futures markets which have dropped from a high of $132 in July 2016 to as low as $123 in December, 2016. (Prices move inversely to yields.)
The SSI chart on T-Note futures above shows that T-Notes corrected by more than their normal expected volatility range … and were stopped out just below $126 back in November.
While prices for most interest-rate sensitive instruments have taken big hits in the past six months, there is one type of yield-generating investment that has held up better than most. It’s the one we told you about a couple of months ago – TIPs.
TIPs are “inflation-protected” treasuries. They have a built-in mechanism to offset the ravaging effect of inflation on bond prices. If the CPI (consumer price index) is rising, then that rise will be a support to prices of TIPs. TIPs basically factor-out inflation from bond prices.
Supporting this bullish position, the dominant one-year time-cycle for TIP shows a likely move higher that should continue into September, 2017.
I’m bullish on T-Notes in general because I like to bet with the smart-money … and the smart-money is literally as bullish as it has ever been when it comes to T-Notes. Not only are the commercial hedgers super-bullish on T-Note futures, the open interest on T-Note futures is also at all-time highs.
You just don’t see this levels of bullishness and interest very often.
Don’t count out the 30-year rally in bond prices (and decline in bond yields) just yet … and if you do decide to try to lock in some of today’s higher yields, TIPs have held up much better than other yield-generating investments.
Have a great weekend,