Bond yields moved lower last year, ahead of the Federal Reserve’s commitment to cut interest rates. Yet, even as the Fed lowered rates by a full percentage point, bond yields have ticked higher.
In theory, rising bond yields are a sign of a healthy economy. That’s at odds with declining inflation and rising fears of a recession amid renewed trade wars. So, investors may want to bet that when bond yields change, it’ll be for lower yields.
That means today’s investors can lock in relatively higher yields with bonds. It doesn’t matter if those bonds are junk bonds, commercial-grade credit, mortgage securities or municipal bonds. When yields finally go down, the price of these bonds will rise.
One simple way for investors to bet on interest rates now is with an ETF. One such ETF is the iShares 20+ Year Treasury Bond ETF (TLT).
TLT’s positioning in long-dated bonds will see the biggest price impact from a swing lower in interest rates.
Action to take: Investors should consider moving some cash here as a way to play the current bond market. TLT currently pays a 4.2% dividend yield, and could also see gains of 15% if shares simply move towards their 52-week high.
For traders, the September $95 calls, last trading for about $1.40, could see mid-to-high double-digit returns if interest rates start trending lower by the fall.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.