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Hedge Rising Interest Rates With TBT

This fund benefits when bond prices hit the skids


As the bond market hangs on every data point, it was welcoming news on Monday when June retail sales data showed a smaller-than-expected gain of 0.4%, versus the consensus forecast of 0.9%. The news sent bond prices higher and Treasury yields lower.

This might sound like bad news for the economy, but it’s viewed as good news for further Fed stimulus, and thus for equities.

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Bond prices enjoyed another day of higher momentum Tuesday, still feeding off those tepid retail sales figures for June. As you can see on the chart to the right, the yield on the benchmark 10-year T-note hit 2.53% in its seventh day coming off the high quote of 2.72% and sits at a key technical uptrend line (the 20-day moving average) that could prove to be a new support level.

How to Play It

While the market has provided some relief from the recent spike in rates, I view this pullback in yield as temporary and one to use for buying the ProShares UltraShort 20-Year Treasury ETF (TBT) position as an interest-rate hedge.

TBT’s value corresponds to double the inverse of the Barclays Capital 20+ Year U.S. Treasury Bond Index — a benchmark that tracks Treasury prices, and one used by the major 20-year fund, the iShares 20+ Year Treasury Bond ETF (TLT). TBT benefits when Treasury prices go down and yields go up, as I expect they will. Specifically, TBT theoretically should improve 2% for every 1% decline in the index.

But remember, with leveraged products, you can amplify your profits, but you also risk amplifying your losses, so tread carefully.

What’s Ahead

The bond market scare is passing, as some of the economic growth indicators “taper” off somewhat from their earlier reports that were more optimistic.

Good things lie ahead for high yield. We’re back in that not-too-hot, not-too-cold climate for strategic high-yield investing. The current landscape is all about the Fed and its taper-on, taper-off policy that is data- and earnings-dependent. Fed Chairman Ben Bernanke keeps reassuring markets that he will keep priming the pump, and Monday’s retail sales figures show that higher gas prices are already clipping consumer spending.

Plus, another blue-chip company, UPS (UPS), guided lower last Friday, adding to the string of downside preannouncements that I’ve been noting of late. More of these warning flags will crimp the near-term upside for many cyclical stocks, but help capital flows targeting dividend-paying and high-yield assets.

Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with a the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.

Stay tuned! Bryan is currently working hard on a brand new strategy that amplifies your income potential by utilizing a conservative options strategy based on stocks you may already own.

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