ETF Expert

In the summer of 2007, the Fed found itself abruptly veering from its rate-raising course to slashing the rates borrowed by banks at the discount window. The help was temporary, as the word "subprime" and the phrase "credit crunch" dominated the headlines.

For 9 months, treasury bonds became the ultimate safe haven for fearful investors. Until March.

In March, the rules of the game changed more dramatically than a Democratic National Committee (DNC) decision on delegate seating. Specifically, the Fed orchestrated a bailout of Bear Stearns. In so doing, regulators are likely to get even more power to intervene in non-FDIC banking activity.

Good thing? Bad thing? That debate will play itself out in Congress and in the financial media over the next several years.

Nevertheless, the rule-changer that occurred in March has led to: (a) the firming up of the U.S. dollar, (b) greater interest in stock assets, and (c) less interest in treasury bonds.

In the chart below, one can see the inexorable rise in intermediate-term treasuries from June 07 to March 08.  Since then, investors have been selling treasuries. The 10-year note’s yield has gone from 3.3% to 4.1%. And the iShares Lehman 7-10 Year Treasury Fund (IEF) may soon enter a technical downtrend. (Today… most likely.)

Long-term treasuries have already fallen below a long-term trend. Indeed, the iShares Lehman 7-10 Year Treasury Fund (IEF) may soon join its older brother, the iShares 20 Year Treasury Fund (TLT), on the "down low."

Granted, stock assets haven’t exactly freed themselves from the bear’s grip. Still, one has to be impressed by the willingness of individual and institutional investors to put sideline money to work.

Where might some of that money be going? Treasury debt is finding its way into high yield (junk) bonds.

Take a look at the general direction for the iShares Corporate High Yield Fund (HYG). Granted, it met with the same technical resistance as equities have in the last few weeks. Still, there appears to be some faith in U.S. companies and/or faith in the Federal Reserve to act quickly in the economy’s best interest.

Where do bond ETF investors go from here? Some consideration should be given to the high-yield arena vis-a-vis the Corporate High Yield Fund (HYG). I made this case effectively in March.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.