06/10/15   Back to Fed Watch

Editor’s Corner

Ron Rowland

Once again, the market is focusing on the Federal Reserve.  The question of when it will begin to raise interest rates seems to be on everyone’s mind.  Meanwhile, the market isn’t waiting, and bond yields are on the rise.

The yield on the benchmark 10-year Treasury has jumped from 1.675% on January 30 to 2.480% in today’s trading.  Depending on how you measure it, this equates to a 0.805% higher value, a 48% increase, or a 1.48x jump.  The 30-year Treasury yield is 0.957% higher, moving from 2.251% to 3.207%, for a 1.42x jump.

When yields go up, prices go down, and the amounts may surprise you.  The iShares 7-10 Year Treasury Bond ETF (IEF) has lost 5.0% from January 30 through yesterday’s close.  The iShares 20+ Year Treasury ETF (TLT) has dropped 14.9%, and the Vanguard Extended Duration ETF (EDV) has plunged 22.2%.  That figure officially places 30-year Treasury bonds in a bear market.

US Treasury bonds are considered to be the safest on the planet.  They supposedly have no credit risk, but it is clear they have interest-rate risk.  Even the SPDR Barclays 1-3 Month T-Bill ETF (BIL) managed to lose 0.1% of its value during this same period.

With solid US Treasury funds losing that much, you are probably wondering how bad junk bonds are performing.  The answer may surprise you.  The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) actually gained in value, increasing 1.1%.  The SPDR Barclays High Yield Bond (JNK) did even better, moving 2.2% higher.  Meanwhile, convertible bonds and international junk bonds have gained more than 5%.  US Treasury bonds may be faltering, but that doesn’t mean all bonds are.

Investor Heat Map: 6/10/15


Health Care remains at the top of the rankings and is the only sector able to post a positive double-digit momentum score today.  Financials continued its climb, moving two spots higher to grab second place.  The group seems to be reacting positively to the prospect of higher interest rates.  Consumer Discretionary maintained its place in third, while Technology slipped two places lower to fourth.  Materials held its fifth-place spot but flipped from green to red, leaving only four sectors with positive momentum.  Last week, only Real Estate had double-digit negative momentum.  Today, Consumer Staples, Energy, and Utilities are joining it.  Real Estate is still on the bottom, but Utilities is acting like it might want that spot.  The two highest yielding sectors are on the bottom, as the rising rates on government bonds are now providing competition.


There is a relatively rare tomahawk pattern in the style rankings today.  The three categories at the top form a shallow blade, and the eight bottom categories are the long handle.  Although most of the market is acting in unison and hugging the flat line, the three at the top are blazing their own upside trails.  The leaders are Micro-Cap, Small-Cap Growth, and Small-Cap Blend.  These three at the top is usually a sign of aggressive investor behavior, but the lackluster showing in the remaining categories puts a cloud over this interpretation.  Micro-Cap ascended to the top this week, pushing Small-Cap Growth one spot lower. Four categories slipped slightly into the red, and Mid-Cap Value fell two spots to the bottom.  With such a tight range of scores across the lower eight categories, their relative rankings loose significance.


China continues to hold down the top position.  China A-shares received a large amount of attention the past week or two as FTSE decided to add them to its emerging market benchmarks.  Yesterday, international indexing behemoth MSCI determined A-shares were not ready for prime time, and said they would not be included in its broad-based emerging markets benchmarks, yet.  Trading in China A-shares has been nothing short of frothy.  If they were part of our Global Edge Chart, they would be registering a momentum reading of more than 100 today.  Small-Cap China A-shares are even more extreme, with Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap (ASHS) surging 107% year-to-date and sporting a momentum reading of 177.  Enter at your own risk, because downside action is usually faster than the upside.  China’s neighbor to the east, Japan, kept its second-place status for a fourth week, and the US improved a notch to third.  The US has lost nearly all of its momentum, and now sits just a sliver above zero.  Since these are cap-weighted benchmarks, the Large-Cap and Mega-Cap categories of the style rankings tend to dictate the outcome.  The other eight global categories are now in the red.  This is twice as many as a week ago, with World Equity, EAFE, Europe, and the UK flipping over.  The four categories previously in the red are sporting double-digit negative readings today.  Latin American continues to occupy the basement, but Pacific ex-Japan and Emerging Markets are not doing much better.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“A lot of retirees have been chasing yields and they were taking risks they’re not aware of by going far out on the maturity ladder.  They’ll get the interest on their bonds but they’ll see their principles starting to drop. They should be getting out of long-term bonds and getting into short-term bonds”

Bernard Kiely, Kiely Capital Management, Morristown, N.J.


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