Fed, Rates and Treasuries
The conclusion of the FOMC meeting is today and to say investors are interested in the outcome would be an understatement. The focus seems to be more on the language of the Feds statement than a hike in rates. This puts the bond market square in the target of interpretation. Simply put, rates will react to how investors interpret the language from the Fed announcements following the policy meeting. I am not in the business of predicting the future, but I am in the business of protecting my money from downside risk. I would be concerned at this time about rates moving higher not just in anticipation of the Fed changing policy, but in addition the risk related to the United States continuing to mismanage their debt situation. The ceiling cap on the national debt is going to be addressed before the calendar turns to a new year and there is not end in sight to the spending. All this adds up to concern about owning fixed income and primarily Treasury bonds.
The chart below is the yield on the 30 year bond. The down trending channel has been highlighted along with resistance points (white lines). The break above the first resistance point (4.4%) would potentially push rates towards 4.7% short term. While the move doesn’t seem like much it would potentially impact the price of TLT (iShares 20+ Year Treasury ETF) for example, by nearly 5% down. If rates moved to the next resistance point (5%) the impact could be nearly 10% down. When you consider the dividend yield on TLT is currently 3.9% the risk is high relative to the yield. As with any projection no one knows the actual outcome, but the key to money management is risk management. Evaluate the potential risk and determine if you can live with the results financially.
You can manage the risk above in many ways. From my view the simpler the better. The simplest would be to set a stop and sell the position if the price falls below you stop. If you want to hold your bond positions you could short Treasury bonds with TBF (ProShares Short 20+ Year Treasury Bond). The potential result would be to offset any erosion in price due to rising rates. When rates stabilize sell TBF and maintain your bond position, simple enough. From my view risk management is the single most important attribute of an investment portfolio. Be aware of your surroundings and manage your money.
