Take a look at this investment chart.
Sure looks like a ride you’d like to take … or an investment you’d want to own …
A six-month moonshot… with a 17% booster-rocket surge in September.
Somebody’s making good money, right?
Actually, not really.
That’s not a stock chart. Or one of the big indexes. Or the price of gold.
That’s the yield on the10-year U.S. Treasury bond – which shot from 3.4% to 4.8% over that five-month stretch
I know, I know. Who cares? Bonds and yields are a total yawner.
At least … they’re boring most of the time.
Right now, though, you should care. You should care … a lot.
That yield surge in the 10-year to 16-year highs is the No. 1 contributor to the whipsawing stocks have taken of late.
Rising bond yields are like an infection – once they rise, general interest rates do the same. And that makes all of us sick, since we all pay more – for everything.
The average credit card interest rate topped 20% last month, and mortgage rates recently hit their highest level in nearly 25 years. The average monthly mortgage payment is 20% higher than a year ago, according to Redfin (RDFN).
(If you’re interested in RDFN as a stock, you may want to temper that ardor. It rates extremely low in my system; its Quantum Score is an ultra-feeble 36.2.)
But wait… isn’t inflation finally cooling down? Yes, this morning’s consumer price index showed inflation steady at 3.7%, way down from 9% in July of 2022.
And isn’t the Federal Reserve ending its rate-increasing assault on inflation? Most likely. Investors right now believe (with an 87% probability) that rates will stay where they are at the next Fed policy session on Nov. 1.
Given all that, it would seem to make little sense that yields and interest rates are spiking.
Until you take a step back and take a deeper look.
And the real story here is a good one … a bullish one … one that shows us that a big rally in stock prices is on the way.
Let me show you. Starting with a quick primer on how bond yields work.
Rising Rates Don’t Make Sense, Except for This
The main thing to know is that bond prices and bond yields move opposite one another. So when you see the yield flying higher like in the chart above, it’s happening because bond prices are crashing.
If you buy a $1,000 bond with a 5% yield, you’ll get $50 a year in payouts. If it’s a 10-year bond, that’s $500 over your decade of ownership.
But what if someone wants to sell you that $1,000 bond for $900? You still earn the $50 a year, which means your yield (based on the $900 you paid) is 5.6%.
The price of the bond dropped 10% to $900, but the corresponding yield actually increased 12% because of the lower purchase price.
Why would the value of the bond itself decrease so dramatically? Because new bonds are being issued with higher rates after the Fed’s rate-raising campaign began in March 2022.
Here’s where the current situation gets especially interesting. If we expect rates to level off or even start to come down, bonds wouldn’t be dropping in value.
And yet, they are dropping – rapidly.
Why would anyone sell bonds right now? They wouldn’t, unless they are unwinding leverage because they think rates are going to decrease.
That is exactly what I think is happening. The trading bears all the hallmarks of bond deleveraging.
Bonds – and therefore yields – usually move in small increments. So when the 10-year yield jumps from 4.5% to 4.9% in a matter of weeks, it doesn’t feel that big on an absolute basis. But compared to normal patterns, it’s a massive jump.
Bond-trading firms, hedge funds, or any other investment product related to bonds plays in “ticks” – those small incremental shifts. You can’t make much money on tiny ticks, so these investors turn to leverage. They borrow money and/or add derivative investments (similar to options on stocks) to increase “leverage,” meaning they get more bang for their buck on returns.
Leverage also means increased risk. And in this case, that risk increases even more if the expectation is that rates are about stop moving higher and may start falling,
A lot of bond funds are heavily levered. Things are going against them, so they have to “cover” by selling bonds. That’s fueling the spike in yields and therefore rates, when everything else says they should do the opposite.
Another Big Lift Is Coming… And You Should Get Ready Now
I recently wrote here in Power Trends about three data points showing the bottom was near and that now is the time to buy stocks.
- My Big Money Index (BMI) official hit oversold, which historically prefaces a big reversal higher.
- The Big Money signals in my system were almost entirely sells recently, which is a sign of “capitulation” and that sellers are about to be exhausted.
- This was all happening on pretty big volume. (You can’t draw conclusions from low volume.)
I would add this bond deleveraging as a fourth point.
Cleaning leverage out of the system is frequently part of the last push by sellers before the turn higher. We saw this in the brutal first part of 2022 on stocks, when a lot of margin debt (money borrowed from brokers to invest) got cleaned out as inflation fears accelerated and the Fed began raising rates. This chart shows margin debt peaking and then unwinding sharply and the resulting plummet in the Invesco QQQ Trust (QQQ), which tracks the 100 largest nonfinancial stocks listed on Nasdaq.
Volatility continued through much of 2022 with lingering uncertainty over how quickly inflation would come down, how long and how high the Fed would raise interest rates, and whether all of that would send the economy into a recession.
After a bull run from October through July, we’ve seen plenty of selling in August and September. We expected it, and we’ve used it to get ready for the turn.
The crash on bond prices is another sign the turn is coming. And as it does, a lot of that money in fixed-income investments like bonds and cash accounts like money market funds – a record $5.9 trillion – will begin to move into stocks and make the next buying wave even bigger.
Bonds are still more attractive than they used to be when interest rates were 0%, but we’re a lot closer to lower rates than higher rates – and stocks will again be the most alluring investment opportunity.
I don’t want to sound like a broken record if you read Power Trends regularly, but I just don’t think investors are hearing it enough…
It’s time to buy.
It’s not just the one highly reliable signal from my Big Money Index. It’s all kinds of signs that we’ve been talking about.
There will always be the scary headlines that make it easy to say, “Oh, I’ll just wait a little longer.” But then you look back a few months later and realized what you’ve missed.
And you want to focus on the Quantum Edge trifecta – those powerhouse stocks with superior fundamentals, strong technicals, and Big Money flowing in.
Those are the stocks with the highest probability of making you money in any market. They are the stocks likely to lead the way in the Big Lift. And they are trading at discounted prices right now.
Jason Bodner’s Power Trends