This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Which Will Fail First, Treasury Bonds or Transportation Stocks?

NEW YORK (TheStreet) -- We are finally getting past all the bad weather-related news from the first quarter of the year. The stock market and bond market are firmly higher for the year to date.

Within the S&P 500 one of the leading sectors are transportation stocks. Using the iShares Transportation Average ETF (IYT) as a proxy, through Tuesday's close it had a total return of 11.03%. Not bad considering the polar vortex shut many roads down for days at a time to start 2014.

The bond market also has had quite a good start this year. The iShares 20+ Year Treasury ETF (TLT) is up an almost identical return of 11.87% so far. Most pundits expected that the rising interest rate trend from 2013 would have continued this year. On Dec. 31 the 10-year Treasury stood at 3.05%, while the 30-year Treasury closed at 3.96%. Recently, the rates were 2.58% and 3.41%, respectively.

As investors know, there is a direct, inverse relationship between interest rates and bond prices. Therefore, these lower rates mean bond prices are higher.

While these two sectors have almost equal returns, something seems amiss to me as a student of the market. Usually Transport stocks go up in an expanding economy while interest rates fall (higher bond prices) in an economy that's contracting. These factors are not congruent with the returns we are experiencing so far. One would believe that one of these sectors is almost certain to fall while the other could continue to expand. So which is it?

An argument could be made in light of the recent revision of the first-quarter GDP to -1% that the economy is contracting, and sticking with the Treasury trade is the way to go. However, most investors believe much of that contraction was weather-related and the old GDP data are being unseated with new economic indicators that show economic growth in the second quarter.

Another contributing factor to these lower rates may be a result of the Federal Reserve buying a higher percentage of new Treasury issuance. Strategas has done some research that found on a rolling six month basis, in spite of the tapering of quantitative easing, the Fed has purchased 73% of the new Treasury bonds issued. This is near the highest levels of all time -- which would contribute to higher bond prices because that would only leave 27% of new bonds available for all other potential buyers. Supply demand increases usually results in higher prices.

My hope is the economy continues to expand and the stock market goes higher. While IYT has a Price to Earnings ratio of 22 that is rich to the market, it is by no means overvalued. I have a long-term price target of $162 for IYT, which now trades at $144.80 after closing Tuesday at $144.90. That's not to say a pullback to $131.25 can't occur, but the momentum is for further appreciation for that sector.

TLT, on the other hand, currently at $111.14, is facing some technical resistance near last week's highs in the $115 per share range. If the economy can show strength as QE is pared back, interest rates should begin to rise again and TLT will fall. We saw the 20-day moving average get breached to the downside when TLT closed at $111.57 Tuesday. The reversal may be coming sooner rather than later.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

>>Read more: Friday's Jobs Report Won't Alter Fed Plans to Raise Interest Rates

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
IYT $149.14 0.00%
TLT $122.71 0.00%
AAPL $130.28 0.00%
FB $79.19 0.00%
GOOG $532.11 0.00%

Markets

DOW 18,010.68 -115.44 -0.64%
S&P 500 2,107.39 -13.40 -0.63%
NASDAQ 5,070.0260 -27.95 -0.55%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs