In 2014 bonds outperformed equities, +11% on the year. However things are obviously changing.
The market maxim , "As bonds rise, yields fall" or "as interest rates rise, bonds fall" is a pretty well known idea as is the concept of the "Flight to safety, out of stocks and rotating in to treasuries". However with the F_E_D about to embark on the unwind of accommodative policy sometime soon (even if soon is defined as the next year or less), there are a number of issues that are just incredibly overwhelming to consider all of them.
Issues such as Bond Duration which is a measure of a particular bond's sensitivity top interest rate moves in the market, not all bonds are the same. For instance, you could say longer "duration" bonds have more duration risk which is a measure of how much a particular bond will move vs a 1% rise or drop in rates. Longer term bonds have more duration sensitivity due to their longer duration, but duration is far from the only factor in determining Duration Sensitivity, other factors such as the interest paid over the lifespan of the bond, call features of the bond, changes in credit quality of the bond all play a role in the duration computation.
We can say broadly that a 1% rise in interest rates would send 10 year bond fund 10% lower while a 1% rise in rates would send a 2 year bond fund 2% lower, the 2 year bond fund has less duration sensitivity.
Additionally a 2 or 5 year bond has not only less volatility due to duration risk, but less time until maturity and would be easier to hold and reinvest the proceeds at a higher interest rate if it came down to it than say a 10 year bond where they are particularly touchy, the shorter term bonds are just going to be less volatile in their movements.
Additionally at 1.776^ yield, a 10-year bond has less yield to offset a price decline, the 30 year yield right now comparatively is 2.366%.
The biggest risk is rates rising faster than expected and as I demonstrated above, the 10 year bond is probably the most vulnerable to interest rate hikes.
Also the F_E_D controls the short term interest rates, but longer term rates are more a function of market dynamics. There are so many variables to consider between interest rates, duration risk, inflation prospects, bank's need for quality collateral as the F_E_D has absorbed a good portion of it, etc., it's quite difficult to look at bonds as we have in the past, especially since the unprecedented F_E_D actions since 2008, there's just not an A-B model to compare, in a sense we are in uncharted waters.
Although I never listen to CNBC as I don't want anything said there to creep in to my subconscious and effect my analysis and because I believe they have conflicting interests, I did catch the immediate analysis after last week's F_O_M_C and one of the commentators thought one of the best trades for 2015, based on what he perceived as a dovish F_E_D stance and it being unlikely in his view that we see a rate hike before 2016, was to buy TLT.
As you know we have been long TLT in a 2x leveraged trade idea that was recently closed because of some 3C signals I didn't like to much.
I've always maintained I'm not a guru, I'm the kind of person who will tell you, "I don't know" if I don't know, although I'll make every effort to find out. In this case, aside from some of the more obvious charts, there are quite a few dynamics I just am not grasping at the moment, I know some of you are much more versed in bonds and if you see something in the charts that strike a chord with you, don't be shy about emailing me and letting me know what you think.
First lets look at TLT because it is exhibiting not only 3C red flags, but price action red flags as well.
I often say that this "bullish looking" price action is a "Red Flag" warning of a trend change to come. Increased price volatility is a feature we often see just between changes of trends or stages, it's what creates the Channel Buster.
This daily chart alone with a near parabolic daily chart in TLT is enough for me to back off the position.
Treasury Futures, ZB=30 year, ZN= 10 year, ZF= 5 year and ZT=2 year...
First the 30 min charts...
15 min chart...
7 min charts...
5 min charts...
I suspect, although I'm quite open to ideas, that there's a move toward shortening duration , it seems obvious in distribution of longer term T-Futures and the much better looking 2 year charts and to a lesser degree, the 5 year charts.
I'm keeping tabs on how these react over the next week or so, to give them some time to take in the F_O_M_C and see if there are any additional changes that stand out that gives us a better perspective on what smart money is actually doing rather than saying.
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