Interest Rates Rise - Bonds Fall

Fed Chairman Ben Bernanke's efforts to lower interest rates through quantitative easing have not delivered the expected results in 4th quarter 2010. Interest rates have, in fact, risen dramatically. This has caused a sell-off in various bond markets. Long term US Treasuries have been hurt the most, while high yield bond have fared the best.

As the bond market began to wane, our trend tracking strategic model gave us sell signals. Adhering to our sell discipline, bond fund positions were systematically liquidated.

Junk bonds and convertible bonds are really a proxy for the stock market. They are less affected by interest rate changes. Since we are bullish longer term on the stock market we recently added new long positions in one of our old junk bond fund favorites and a convertible bond ETF.

The chart below clearly illustrates the decline in high quality bonds.

(Click on chart to enlarge it for easier viewing)