First let's make sure we understand the basics of bonds.https://magnateinvest.com/
Bonds are a questionnaire of debt. When a company or even a government needs to borrow money it can borrow from banks and pay interest on the loan, or it can borrow from investors by issuing bonds and paying interest on the bonds.
One advantage of bonds to the borrower is that the bank will usually require payments on the principle of the loan along with the interest, so your loan gradually gets paid off. Bonds enable the borrower to only pay the interest while having the use of the whole quantity of the loan before the bond matures in 20 or 30 years (when the whole amount must be returned at maturity).
Two main factors determine the interest rate the bonds will yield.
If demand for the bonds is high, issuers won't have to cover as high a yield to entice enough investors to get the offering. If demand is low they will need to pay higher yields to attract investors.
One other influence on yields is risk. In the same way an undesirable credit risk has to cover banks a higher interest rate on loans, so a business or government that is an undesirable credit risk has to cover a higher yield on its bonds in order to entice investors to get them.
One factor that surveys show many investors do not understand, is that bond prices move opposite with their yields. That is, when yields rise the cost or value of bonds declines, and in another direction, when yields are falling, bond prices rise.
How come that?
Consider an investor running a 30-year bond bought several years back when bonds were paying 6% yields. He wants to market the bond as opposed to hold it to maturity. Claim that yields on new bonds have fallen to 3%. Investors would obviously be willing to cover significantly more for his bond than for a new bond issue in order to get the larger interest rate. So as yields for new bonds decline the values of existing bonds go up. In another direction, bonds bought when their yields are low might find their value in the market decline if yields begin to rise, because investors can pay less for them than for the newest bonds that'll let them have a higher yield.
Prices of U.S. Treasury bonds have already been particularly volatile throughout the last three years. Demand for them as a safe haven has surged up in periods when the stock market declined, or when the Euro-zone debt crisis periodically moved back in the headlines. And demand for bonds has dropped off in periods when the stock market was in rally mode, or it appeared that the Euro-zone debt crisis have been kicked later on by new efforts to create it under control.
Meanwhile, in the background the U.S. Federal Reserve has affected bond yields and prices using its QE2 and 'operation twist' efforts to carry interest rates at historic lows.
Consequently of the frequently changing conditions and safe-haven demand, bonds have provided the maximum amount of chance for gains and losses whilst the stock market, if not more.
For instance, just since mid-2008, bond etfs holding 20-year U.S. treasury bonds have seen four rallies in which they gained around 40.4%. The smallest rally produced a gain of 13.1%.
But they were not buy and hold type situations. Each lasted only from 4 to 8 months, and then a gains were completely removed in corrections in which bond prices plunged back with their previous lows.
Lately, the decline in the stock market during the summer months, accompanied by the re-appearance of the Euro-zone debt crisis, has had demand for U.S. Treasury bonds soaring again as a safe haven.
The result is that bond costs are again spiked as much as overbought levels, for instance above their 30-week moving averages, where they are at high risk again of serious correction. Actually they are already struggling, with a potential double-top forming at the long-term significant resistance level at their late 2008 high.
Here are some reasons, along with the technical condition shown on the charts, to expect an important correction in the price of bonds. invest in premium bonds
The current rally has lasted about provided that previous rallies did, even throughout the 2008 financial meltdown. Bond yields have reached historic low levels with almost no room to move lower. The stock market in its favorable season, and in a new leg up as a result of its significant summer correction. Unprecedented efforts are underway in Europe to create the Euro-zone debt crisis under control. And this week those efforts were joined by supportive coordinated efforts by major global central banks that will likely bring relief by at least kicking the crisis down the road.
Holdings designed to move opposite to the direction of bonds and therefore produce profits in bond corrections, include the ProShares Short 7-10yr bond etf, symbol TBX, and ProShares Short 20-yr bond, symbol TBF. For those attempting to take the extra risk, there are inverse bond etfs leveraged two to 1, including ProShares UltraShort 20-yr treasuries, symbol TBT, and UltraShort 7-10 yr treasuries, symbol TBZ, designed to move twice as much in the contrary direction to bonds. And even triple-leveraged inverse etf's such as the Direxion 20+-yr treasury Bear 3x etf, symbol TMV, and Direxion Daily 7-10 Treasury Bear 3X, symbol TYO.
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