Interest Rates: What Happens When This 30-Year-Old+ Trade Isn’t There Anymore?

Interest Rates Up

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Interest Rates Are on the Move to the Upside; Watch the Bond Market

I can’t stress this enough: watch the bond market because the U.S. Federal Reserve and central banks around the world are talking about raising their interest rates.

Last weekend, I met up with a friend of mine. Every time we meet, we talk about nothing but markets. We always talk about where the next big move is going to be, and how it will look.

A little background: while we both started out as equity traders at a proprietary firm, we parted ways a few years back. He went on to do investment banking, and he is now at a private equity firm. So, he is very well versed in the markets and economics.

This past weekend, the bond market was the topic of our discussion.

In case you didn’t know…

Bond yields have increased immensely as the Federal Reserve has started to raise its benchmark interest rates. In the last year:

  • One-year U.S. Treasury yields increased close to 111%.
  • Two-year U.S. Treasury yields increased 101%.
  • 10-year U.S. Treasury yields increased 38.6%.

Here’s one more thing: the 10-year yields stand at a very critical level. They were trending downward since the 1980s. These yields are currently making a solid run to the upside, and the 30-year+ trend could be broken very soon.

See the chart below for some perspective.

Chart courtesy of StockCharts.com

No matter how you look at it, it appears that higher interest rates are creating problems for the bond market.

30-Year-Old+ Trade Isn’t Working Anymore

Back to my conversation…

My friend Steve said to me, “You do realize, at the major trading desks around the world, there are traders sitting there who have never seen bond yields go higher.”

He added, “The trade was very simple for them. You bought bonds, and they did well. Your portfolio looked great.”

When bond yields go down, it means that bond prices have increased.

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