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Treasury Bonds: New Lows, Now What?

NEW YORK ( Fabian Capital Management) -- The volatility in interest rates this year has been particularly troublesome for fixed-income investors.

Much of the jump in long-term Treasury bond yields has been due to the expectation of the Federal Reserve tapering its asset purchase programs in 2013. The unrelenting rise in stock prices combined with investors pouring assets into equity-oriented funds at a breakneck pace has also put downward pressure on the fixed-income sector. The recent municipal bankruptcy headlines in Detroit certainly haven't helped matters either.

These factors have combined to create a panic situation in Treasury bond prices that has sent long-duration ETFs such as the iShares 20+ Year Treasury Bond ETF (TLT) to new lows last week. TLT is currently down over 14% from its May 2013 high and appears to be headed lower.

The fundamental and technical picture for long-term Treasury bonds is certainly weak. Right now the price of TLT is in a persistent downtrend with no hint of stabilization on the horizon despite the Fed's recent reassurance that it will continue its indefinite $85 billion per month bond-buying program. Investors are signaling that the long-term fear of inflation and appetite for risk are trumping the safety of Treasury bonds at this juncture.

Even Pimco's Chief Executive Officer Mohamed El-Erian is recommending that you keep your bond exposure in the short to intermediate-term duration in order to lighten the interest rate risk in your portfolio. He also stated that he feels bonds represent a better value than stocks right here, and I tend to agree with him.

Despite the fact that stocks can remain at these levels for an indefinite period of time, I don't believe that making new allocations to equities at these highs makes a lot of sense.

I still feel that moving forward we are going to see continued volatility in fixed-income for the remainder of 2013. That includes strong price moves, both up and down, in response to changing conditions. One uncertainty that the bond market will be paying close attention to is the selection of the next Federal Reserve chairman. Ben Bernanke's term will expire in January 2014 and thus we can expect a new candidate for the post to be narrowed down in the coming months.
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