Yields continue to rise, hurting bond fund investors

In my last post on October 27th, I highlighted the breakdown of the 30 year US Treasury Bond chart, and explained how we were moving exposure away from the long duration bonds into shorter duration bonds to take a defensive position.

Since that time we have had a significant run-up in longer term interest rates, and correspondingly, a significant decline in long term bond prices. For example, if you had a $100,000 invested in the Vanguard Long-Term Treasury Bond Fund on October 27th and did nothing, that $100,000 would have declined to $93,677 as of Friday December 10th.

This is just one example of where active management can play an important role in protecting gains and minimizing volatility.

US 30 YEAR TREASURY BOND FUTURE CHART (click chart to enlarge)

STOCK MARKET

We have entered the seasonal strong period (November thru April) for stocks. We have had nice steady climb for stocks in the first six weeks of this period and this also follows a strong showing in the traditionally weak months of September and October. I am currently starting to see many bullish extremes in some of the sentiment indicators which gives me some concern. On Friday we hedged our stock positions with the double inverse S&P 500 ETF (SDS). This is a short term precautionary move to protect recent profits, and if conditions improve we may unwind this hedge fairly quickly.

The S&P 500 Index broke above prior resistance levels over the last couple of days and if we can hold above here for a few more days the show of strength would be another reason to remove our hedge. A drift upward into year end is definitely a possibility as under invested and under performing fund managers look to get invested. We will continue to monitor the action closely.

SPY (S&P 500 ETF) CHART (click to enlarge)