ETFs to Fit Particular Bond Paradigms

NEW YORK (ETF Expert) -- Bonds were dramatically overbought throughout the summertime. Blame it on "Fed QE2-speak" or deflationary pressure or a herd-like fear of stocks. Nevertheless, the 10-year's yield of 2.3% bordered on insanity.

By the way, kudos to those who chose intermediate bond exchange-traded funds at the start of May, and then "went away" until the start of November. Investors who executed a seasonal trade of iShares Investment Grade Corporate Bond (LQD), for instance, witnessed 8% gains over a six-month stretch.

Still, the markets giveth and the markets taketh away. The 10-year Treasury may have began the year at a 3.25% yield, and it may have slipped 100 basis points over the half-year soft patch, but it has since recovered the place it occupied at the start of 2010.

Perhaps the 10-year will close out 2011 near 4%. And the current level of 3.3% shouldn't be viewed as a distrubingly high yield. (Are you kidding me?) Indeed, it's not the present yield that should trouble anyone, but rather the quickness of the bond blowout in November and December. We're talking about a 100 basis point recovery in just six weeks!

There are at least three different camps that endeavor to explain why bond yields have risen so dramatically and so quickly. Here are a variety of ETFs to fit one or more of these particular paradigms.

Possibility No. 1 -- Bond yields soared on decidedly brighter economic expectations.

According to Goldman Sachs, U.S. consumption is conspicuously growing, industrial activity is moderately accelerating, real estate is holding firm, employment is turning positive, gross domestic product forecasts are increasing and core inflation is a non-factor. Bigger picture for GS, then? The economy is expanding at a reasonable rate.

Goldman didn't stop there, however. The research team issued an S&P forecast of 1450 for year-end 2011, and recommended overweighting cyclical sectors like technology, consumer discretionary and industrials. If you buy into the Goldman Sachs paradigm, you might want to access SPDR Select Consumer Discretionary (XLY), SPDR Select Industrials (XLI) or iShares DJ Technology (IYW).

Possibility No. 2 -- Bond yields soared on U.S. deficit fears.

Forget the fact that the federal deficit has surged from $161 billion to $1.5 trillion in four years. According to deficit hawks, the yields that began to skyrocket in November 2010 reflected the bipartisan compromise on economic stimulus; that is, Bush-era tax rates would be extended for a "permanently temporary" period of two years, hundreds of billions more would be added to unemployment coffers, and none of it would be paid for by accompanying cuts in spending.