| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Profit From the Pain To Come in Bonds |
| WSJ.COM, December 17, 2007
Wall Street suddenly woke up last week to the simmering threat of inflation. Long-dated bonds fell as investors grew nervous that inflation would eat away at their yields.
But if history is any guide, the market reaction still has a long way to go.
That'll be bad news for long-dated bonds. And good news for mutual funds that bet against them. What sort of funds are those? Fund companies Rydex and ProFunds offer investment vehicles, open to anyone with a few thousand dollars, that use derivatives to bet on higher interest rates. (Full disclosure: I have one in my portfolio.)
Wall Street reeled late last week after producer and consumer price inflation came in much higher than analysts had expected. The surprise makes you wonder where those analysts shop, live, or work. Do they heat their homes? Drive cars? Get their hair cut? Do they eat?
In the last two years the cost of a loaf of bread has risen 13%. Eggs are up 44%. Milk and apples 16% each. And getting the trash collected costs 10% more. These are from the government's official data, available online for anyone to see.
Home heating oil is up 30% and electricity 12%.
New cars cost the same as they did in November 2005, but driving them costs a lot more. Gasoline is up by a third, and even maintenance and repairs are up 7% on average.
It costs 11% more to go to the dentist than. Tuition is up 12%. House prices may be off the boil but rents are up 7.5%. Pet food? Up 12%.
There is, literally, no escape from inflation. Even funeral costs are up 10%.
Which makes you wonder what on earth 30-year Treasury yields were doing down at just 4.28% a few weeks ago? And what are they doing at the still-low 4.66%, right now? In the past, investors have demanded compensation for lending their money to Uncle Sam for 30 years. So why should today be different?
"Dan Fuss, the legendary bond guru at Loomis Sayles, says "technical factors" in the bond market are partly to blame.
The short version: Panic over the mortgage crisis sent lots of institutional investors piling into the unassailable safety of Treasuries by default, regardless of what they thought of the prices. There was also a whiff of concern that the mortgage meltdown would lead to deflation.
One of the many unintentional jokes on Wall Street is that government bonds are "risk-free" assets. They are, in fact, very much at risk from rising inflation. Rising prices will slash the value of those fixed coupons, and send bond prices tumbling.
Today's chart shows how much investors have traditionally demanded as compensation for lending money to the government for thirty years. The chart tracks the difference between the yield on the thirty-year government bond and the consumer price index, going back to 1987.
![[chart]](http://s.wsj.net/public/resources/images/OA-AP121_bond_y_20071214174422.gif)
For most of this time, investors purchasing 30-year Treasuries demanded a yield that was a few percentage points over CPI. The range seems to have been between about 2% and 4%, although in more recent years it has fallen to the 1%-to-3% range.
Last month, the CPI hit 4.3%. The real long bond yield briefly went below that, to just 4.28%.
Even today, it's only rebounded to 4.66%. Positive spread: just 0.36%.
Obviously, 30-year bonds are seeking to anticipate inflation over their entire span, rather than at the time of purchase. But no one knows in advance what that inflation is going to turn out to be. The current CPI, on the other hand, is knowable.
Maybe investors will make out OK. Maybe the economy will even see Japanese style deflation and holders will turn out to be astonishingly prescient.
But the odds are scarcely appealing. Especially if billions of people in emerging markets continue to join the middle class and bid up prices for everything from fuel to food as well as the metals, plastics and other materials that go in middle class consumer goods.
If only we could cut prices again by shipping our manufacturing to China. The trouble is, most of the manufacturing that can move, already has.
As a private investor, you can bet on higher bond yields. The best known mutual fund to do this is the Rydex Inverse Government Long Bond Strategy fund. It has been around since 1995, and used to be known as the Rydex Juno fund. ProFunds also offer two: the Opportunity 10 ProFund, whose prices tracks the yield on the 10-year bond, andOpportunity Rising Rates, whose price tracks the 30 year. The funds do have yields, typically of a few percent. Both ProFunds vehicles use leverage to juice their returns -- something that works in both directions. Caveat emptor.
Of course as bond yields have fallen, these funds have followed suit. Investors who got in early -- especially those who got into Juno all the way back in 1995, when it opened -- have suffered. But back then government bonds were not especially cheap.
The question today is whether rates have hit bottom -- and by how much they are likely to rise. Would you really lend money to Uncle Sam for 30 years for little more than today's inflation rate?
Write to Brett Arends at brett.arends@wsj.com
Copyright, Wall Street Journal
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