Most people think that bonds are boring. And for the most part, they’re right. Until they’re not, which is the time to listen.
That time is now.
During the 2007-2009 financial crisis some of the most exciting trades came from the bond market.
The reasons?
First, the bond market is larger than the stock market.
Second, the bond market is primarily made up of institutional money, not retail.
Third, because of that institutional aspect, bond traders take a much longer view of the market forecast than stock traders.
All of this means that the bond market can literally tell the stock market where to go.
Want to see it at work?
In 2021 we saw a rollover in the bond market begin in July, six months ahead of the S&P 500’s top. Just one month ahead of the stock market’s failure, the bond market started its precipitous drop.
For those watching, those two moves tipped the stock market’s hand that a bear market was inevitable.
Today we’re facing a mirror image as bonds are once again revving-up for a potential bull market move.
Last October, just ahead of stocks, shares of the iShares 20+ Year Treasury Bond ETF (TLT) formed a technical bottom as the first signs of buying strength formed a trend.
Shortly after that, names like Bill Gross and Jeffrey Gundlach – two titans in the bond market – took to the airwaves to announce the death of the bear market bear.
They were somewhat right.
Since then, we’ve seen bonds wrestle with the longer-term outlook for the economy as inflation has remained a persistent threat.
That’s changed now.
Inflation is on the decline and the Fed is getting ready to start lowering rates in September. That makes a bond trader happy, and bullish.
The economy is now somewhat in question. Unemployment is on the rise, consumer activity slowing and manufacturing levels starting to slow. Those are all signs that we may be headed for something bumpier than a “soft landing”.
But we’ve been in this spot before, and it was still good for bonds.
The Financial Crisis that started in late 2007 was the beginning of a strong bull run in the bond market.
May of the same characteristics of that market are present today, including a renewed breakout in the iShares 20+ Year Treasury Bond ETF (TLT).
Over the last two weeks we’ve seen a rush of buying activity in the TLT shares.
The move comes as investors of all levels begin to prepare for one of the largest migrations of cash in years, maybe decades.
The Fed’s lowering of rates will send many investors on a quest for yields and value trades. and there’s no place more ripe for both than the bond market right now.
Bonds that have been issued over the last few years have higher interest rates, thus higher yields. It’s the reason that we’ve seen investors moving money into money-market and savings accounts.
Those type of accounts are backed by short-term bonds.
Rates on those short-term accounts are sure to start dropping quickly. That drop is going to have a lot of investors looking to lock in higher interest rate yields by way of longer maturities.
That’s where the 20+ Year Treasury Bond ETF comes in.
Prices on the TLT will begin to climb quickly as the Fed takes action to lower rates.
The uncertainty in the market is also ready to act as a catalyst.
Investors and portfolio managers are going to start moving assets into “safe harbor” assets if signs of a recession persist. The bond market will be at the top of the list of destinations for this cash.
As I said, this is almost a mirror image of 2007’s Great Recession.
Here’s where things go from here and how to position for the bull run in bonds…
Within the last two weeks, the iShares 20+ Year Treasury Bond has started breaking into a new long-term bull market trend.
A new bull market trend would be the first since the bond market turned bearish in early 2021.
The shift into a new long-term bull market also duplicates the activity that we saw in the TLT shares in 2007 as shares made a strong move into a new bull market trend. In both cases, the Fed was shifting into a lower interest rate policy period.
Markets love round numbers and the more zeros the better. They’re considered heavy psychological “triggers”.
TLT shares moved to the $100 last week before pulling back to their current price just above $96.
A move above the $100 will lure a massive crowd of buyers back into the bond market.
From there, expect that investors will open the flood gates on their move to the bond market in a rush to safety and yields that hasn’t been seen in almost a decade.
The initial move should increase value of the 20+ Year Treasury Bond ETF by another 10% to a price of $110, followed by another strong migration of cash into the bond market after the Fed’s first interest rate cut, rallying the 20+ Year Treasury Bond ETF to $120, another 9% higher.
Obviously, I’ve started adding TLT shares to my portfolio by simply adding the 20+ Year Treasury Bond ETF shares as a buyer.
In addition, I am leveraging the move using longer-term call options (January 16, 2026 expiration calls). Keep in mind that you are not able to collect the monthly $0.31 per share dividend on the TLT when using LEAPs or any other options.
More aggressive traders may want to consider the ProShares Ultra 20+ Year Treasury (UBT). This ETF offers a tool for investors to leverage moves in the bond and pays a quarterly dividend to investors.
