Well, that settles it.
Treasuries suffered their first annual decline since 2009 — with long-term notes and bonds that mature in 10 years or more losing a hefty 12 percent. The bond market — junk bonds, Treasuries, mortgage bonds and so on — had its worst year in 14.
And by all accounts, the losses are far from over. Even the ever-conservative Wall Street crowd is forecasting a further rise in 10-year yields. The average target, according to Bloomberg, is 3.4 percent by the end of 2014. But for all the reasons I’ve been sharing for months, I think that will ultimately prove far too conservative.
|The Fed’s shift on QE is pushing bond yields higher and prices lower.|
One key factor is selling momentum. Ten-year note yields breached the 3 percent barrier for the first time in 2 ½ years as 2013 was coming to a close. When you pass through large, round numbers in the bond market, you often see follow-on selling from technically oriented investors who monitor those levels.
Another factor is the Federal Reserve’s total shift on quantitative easing. Just as I suspected, they agreed at their December meeting to start tapering QE by $10 billion per month. And since then, policymakers have followed up with comments and speeches suggesting they will lop an additional $10 billion off the program at every meeting this year. At least one official put a number as large as $20 billion on the table, assuming the economy continues to firm up.
We’re definitely still on track in that department. Around the holidays, we learned that durable-goods orders shot up by 3.5 percent in November, while a subindex that tracks business investment rose at the fastest pace since January. Jobless-claims figures have been fairly positive, while GDP growth for the third quarter was revised up to a greater-than-expected 4.1 percent rate.
Home sales have cooled a bit, as you might expect, what with mortgage rates rising. But the Fed has been fairly sanguine about the easing off of momentum because other parts of the economy are picking up the slack.
Long story short? I would still recommend staying the heck away from bonds in 2014, just like I recommended staying the heck away from them in 2013. If you’re a more aggressive investor, you can consider specialized investments designed to help you profit from the great bull market in interest rates.
And despite the mess in the bond market, there are plenty of profit opportunities presenting themselves in other areas. I’ll do my best to guide you to them now that the calendar has turned and a new year is upon us!
Until next time,