Dow Closes Up 62; Is the Bond Market Rally Over?

Bonds have had a stronger 2014 than the Dow, but today's rise in yields points to a possible change in bonds' future.

Mar 6, 2014 at 4:31PM

Thursday featured a solid day for the Dow Jones Industrials (DJINDICES:^DJI), as the stock market continued to plow higher and the S&P 500 set another new all-time record. Much of the enthusiasm for stocks has come from the perception that the global economy has finally made a lasting recovery from the financial crisis five years ago and from subsequent tremors in Europe, China, and other hotspots across the globe. But with the yield on the 10-year Treasury note (TREASURY: TC10Y) having seen a substantial rise in the past several days, investors are wondering whether the surprising gains in bond prices so far this year have finally come to an end.

Source: National Archives and Records Administration.

A sign of things to come?
In the grand scheme of things, today's rise of about 4 basis points, or 0.04 percentage point, in the 10-year Treasury yield wasn't all that substantial a move. Even at levels just below 2 3/4%, the yield on the 10-year is still well below the 3% mark it hit at the end of 2013.

Yet the big potential catalyst for a move higher in yields will come tomorrow when the Labor Department gives its reading on February's unemployment rate and nonfarm payroll growth. Today's data on jobless claims already supported the thesis for a recovery in jobs, with a drop of 26,000 claims to 323,000 raising hopes that Friday's jobs number will be stronger than January's disappointingly sluggish pace of employment growth. Economists expect payroll gains of about 150,000, setting a relatively low bar for a positive surprise.

More importantly for the intermediate term, most investors now believe that most of the unfavorable economic data we've seen over the past couple of months have been weather-related. If inevitable warmer weather this spring releases what proves to be pent-up demand that consumers didn't satisfy during the cold winter, then the resulting boost in economic growth will confirm the Federal Reserve's course of easing back on its bond-buying activity. That in turn should support the upward movement in the Dow that we've seen since the beginning of February, and higher bond rates will be necessary to compensate bond investors for the returns they're missing out on in the stock market.

Endless supply
From an even longer-term perspective, bond investors are also somewhat worried about the latest trends in Washington. With the new budget proposal from the Obama administration including substantial tax increases without funneling all of the resulting revenue increases toward closing the budget deficit, the government is signaling a potential pullback even from the small efforts that it has made to try to rein in the federal debt's growth. With a debt-ceiling debate now off the table for 2014, bond investors need to prepare for the potential for rising supplies of Treasuries.

Investors in exchange-traded funds that own bonds have started to do exactly that, moving money out of bond ETFs. According to Bloomberg data, investors have moved an average of $7.3 billion out of bond ETFs in the past five days, in contrast to inflows earlier in the year. So far, losses in bond ETFs have been modest, with iShares 20+ Year Treasury ETF (NYSEMKT:TLT) falling just 2.2% since Monday and iShares Barclays TIPS Bond ETF (NYSEMKT:TIP) dropping less than 1%. Still, both of those ETFs suffered big losses in the latter part of 2013, once it became clear that the Fed taper would happen.

On the other hand, geopolitical risk could help Treasuries. Right now, part of what's pushing yields higher is the reduced tension between Russia and Ukraine, reversing the drop in yields that accompanied Russia's aggressive moves in the Black Sea region last weekend.

Unfortunately, there's no certainty whether the bond market's best days are over or not, as pressure to push interest rates higher and bond prices lower could disappear if the economy starts slowing down. For now, though, economic conditions appear to be strengthening, and that could spell trouble for bonds in the coming months and years if it lasts.

Go beyond bonds
Bonds aren't the only way to get investment income. One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information