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Has the Great Bond-Market Breakdown Arrived?

After bonds have traded sideways for months, does Friday's selling mean the Great Bond Breakdown is here?

by 2/6/2012 8:15:54 AM
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Next to betting against Apple (AAPL), the argument that bond prices were headed significantly lower has been a difficult one to wage over the past several weeks and months. But does the plunge of more than 2% in the iShares Barclays 20+ Year Treasury Bond Fund (TLT) suggest that sellers might finally have the upper hand?

During the extended, range-bound trading in bond exchange-traded funds (ETFs) like TLT -- a range that extends back to late September of 2011 -- there were a number of opportunities for bond bears to send out the alarm. However, these sell-offs in TLT -- and, for that matter, in the Vanguard Total Bond Market ETF (BND) and the iShares Barclays Aggregate Bond Fund (AGG) -- proved to be little more than buying opportunities for traders and active investors looking to take advantage of short-term weakness in these markets.

Consider this: most recently in the TLT, a pullback that took the ETF lower for five out of six trading days was met immediately by a rally that sent shares more than 3% higher over the next four sessions. A three-day setback at the beginning of January in the AGG served as the catalyst for a rally that brought the fund to what were then new, multi-month highs.

Heading into trading today, all three of the funds mentioned -- TLT, AGG, and BND -- have closed in oversold territory above the 200-day moving average, though it is the iShares Barclays 20+ Year Treasury Bond Fund that has dropped for three days in a row (including Friday's sell-off). As such, TLT is significantly more oversold and has a positive edge that is nearly three times that of AGG.

Also selling off on Friday was the iShares Barclays TIPS Bond Fund ETF (TIP). TIP closed down by more than three-quarters of a percent, finishing in technically oversold territory.

One area of the bond market where selling has not been dominant has been the high-yield bond market where ETFs like the SPDR Barclays High Yield Bond ETF (JNK) and the iShares iBoxx High Yield Corporate Bond ETF (HYG) edged higher at week's end. Both JNK and HYG are trading in bull-market territory, having climbed back above their 200-day moving averages in the second half of January and December, respectively.

Be sure to read our latest column from 7 Stocks You Need to Know: Trading a Double Shot of Peet's Coffee and Tea.

David Penn is Editor in Chief of

Disclaimer: The views represented in this column are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.


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