NEW YORK (TheStreet) -- Federal Reserve Chair Janet Yellen is worried about stretched valuations in the stock market, while investors are searching for yield. Due to this dilemma, the market dynamics are changing for bonds, gold, crude oil and the dollar.
There's no need to search for yields. Take advantage of short-term markets volatility to trade bonds, gold, oil and the dollar using exchange-traded funds. Let's start with the importance of bond yields.
The yield on the 30-Year U.S. Treasury bond has risen by 81.7 basis points from its record low of 2.22% set on Jan. 30 to 3.04%, set on May 7. The yield on the 2-Year U.S. Treasury note rose by just 21 basis points over this same period. This is a "bearish steepening" of 60.7 basis points.
A bearish steepening of the yield curve is a warning that the economy is growing at a slower-than-desirable pace, which could slow the pace at which the Fed raises the federal funds rate, and thus the normalization of interest rates. This could be part of Yellen's thought process, as higher bond yields are a drag on equity valuations.
Higher yields hurt corporations wanting to increase debt as the spread above "risk-free" U.S. Treasury yield widens. As yields on corporate bonds widen investors should not be searching for yield. Bond yields will rise and bond prices will fall!
This process will also be a drag on the important -- and economically sensitive -- housing market. Banks will reduce their mortgage lending in an already-sluggish housing recovery.
The dynamics of the yield environment make it important to understand that bonds can be traded just like stocks. The first two graphs will show investors the relationship; when yields are rising, bond prices are falling.
Here's the daily chart for the 30-Year U.S. Treasury bond.
Courtesy of MetaStock Xenith
This graph shows that the yield on the 30-Year bond had been below its 200-day simple moving average since March 13, 2014, when this yield was 3.69%, until recently. Note the rise in yield from 2.22% on Jan. 30 to 3.04% on May 7, and that the 200-day simple moving average of 2.86% held on May 8.