The 30-year Treasury Bond. On the surface, it’s just another potential investment – like IBM shares, a gold coin, or one of the mutual funds you have available in your 401k plan.
But I think it can tell us a lot … much more than many other investments out there. That’s because its price (and on the flip side, its yield) is influenced by so many things … and because changes in that price are a great economic indicator.
Think about it. If investors are worried about growth and inflation picking up, they sell bonds. After all, inflation erodes the value of the fixed principal and interest payments bonds deliver. That’s a bullish sign for the economy.
If investors believe they can generate higher returns from riskier investments like stocks, they’ll dump their bonds to invest in those instead. That’s a bullish sign for the economy, too.
If foreign investors are worried about the value of the U.S. dollar, they’ll often dump bonds as well. That’s because they can lose money from a falling dollar against their home currency, even if bond prices hold steady. That gives you clues on how to adjust your own currency investments.
But take a look at this chart of the yield on the 30-year Treasury Bond …
Or take a look at this chart of the iShares 20+ Year Treasury Bond ETF (TLT), an ETF that tracks the price of longer-term U.S. Treasuries …
What stands out? Investors simply aren’t dumping bonds! Thirty-year bond yields are generally falling, while 30-year bond prices are generally rising. This is happening despite relatively “hawkish” talk from the Federal Reserve about hiking interest rates, and despite the July rally in stock prices.
My take on the action? Investors just aren’t buying into the idea that the economy is going strong. They’re worried that growth and inflation are far from robust … and that stocks (and real estate) are overvalued. So they’re sticking with their Treasuries come heck or high water.
Unless and until you see that trend change, it wouldn’t hurt to stick with a relatively cautious investment approach. Or stated another way: The 30-year bond is telling us something. We owe it to ourselves as wise investors to listen!
Until next time,
Mike Larson is a Senior Analyst for Weiss Research, and is also the creator of the course “How to Profit From Rising Interest Rates”. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.