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Why Bond Bears Are Wrong

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Ask any Wall Street pro and they’ll probably tell you there’s plenty to hate about bonds. The yield income is paltry and the impact of higher interest rates ahead would do serious damage. Yet, Wall Street’s doom and gloom forecasts for the bond market continue to be wrong.

Instead of crashing, the price of long-term U.S. Treasuries (TLT) has increased 21.74% over the past year. That’s better than both the Dow Jones Industrial Average and the S&P 500. Only the Nasdaq 100’s gain of 26.22% has managed to beat boring Treasuries.

Treasury bulls that use leverage have done even better. The Direxion Daily 20+ Yr Treasury Bull 3x Shares (TMF) and ProShares Ultra 20+ Yr Treasury ETF (UBT) have scored sizzling gains of 70% and 45% respectively. TMF aims for triple daily performance to long-term U.S. Treasuries while UBT uses double, or 2x, daily leverage.

Since the start of 2015, the iShares Barclays 20+ Yr Treasury Bond ETF (TLT) is once again beating both the Dow and S&P 500 with a 4.1% gain.

Meanwhile, the Vanguard Total Bond Market ETF (BND), a broader measure of the U.S. bond market, is holding steady with a 2.03% versus gains of 1.8% to 2.5% for the Dow and S&P. Did I mention the 12-month yield for BND trumps both stock market benchmarks?

Interestingly, the iShares Short Term Treasury Bond ETF (SHY) has amassed $8.5 billion in assets despite carrying a 12-month yield of just 0.39% while charging annual expenses of 0.15%. The silver lining is that bonds with shorter durations of three years or less are adversely impacted much less compared to bonds with longer durations when interest rates climb. 

When will interest rates rise?

At the very least, history should be our guide. And going back to the 1820s, history shows the bottoming process in interest rates lasted approximately 10 to 15 years. This was the case after the Erie Canal construction, the 1907 panic, and World War II.

If 2008 is our beginning point for this current bottoming cycle in bond yields, that would imply at least another three to eight years of a low-yield environment based upon historical bottoming norms of 10 to 15 years.

Nobody knows if this scenario is on the verge of repeating history. But if does, it could translate into more gains ahead for bond investors.

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