How Much Higher Can U.S. Treasury Yields Go?

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The yield on 10-year U.S. Treasury bonds (^TNX) has already surged more than 53% year-to-date. How much higher can rates go up? 

The chart below gives us a historical point of reference. It shows the yield spread (or difference) between 10-year Treasury yields and the Federal Funds Rate (FFR). The yield spread between both benchmarks has never been more than 400 basis points or 4%.

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And today, with 10-year yields now around 2.90% and the FFR between zero and 0.25%, the 10-year yield would need to shoot up to 4.25% to break historical records. That leaves a potential 1.35% upside in 10-year yields, should the FFR hold steady and should rate relationships stay within their historical limits.

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The 2013 selloff in U.S. Treasuries (IEF - News) is the 13th largest over the past 50 years and bond investors (AGG - News), especially holders of longer maturating debt, are getting clobbered.

The iShares Barclays 20+Yr Treasury Bond ETF (TLT - News), which tracks U.S. Treasuries with maturities of 20 years or longer, has been crushed 14% year-to-date. With TLT's 12-month yield now near 2.92%, it would take almost five years of yield just to recoup 2013's year-to-date losses! Of course, that's assuming no further spikes in interest rates, which is a fairyland view at best.

Conversely, it's been a great trade for Treasury bears. Inverse Treasury ETFs that climb in value when rates rise like the ProShares -2x Treasury 20+Yr Bear ETF (TBT - News) ahead by +24.38% and the Direxion -3x Treasury 20+Yr Bear ETF (TMV - News) up +34.48% year-to-date.

Because of surging interest rates, the Federal Reserve is sitting on roughly $200 billion in mark-to-market losses, as our just released September ETF report highlights. Will losses in the Fed's bond portfolio top a trillion dollars? Could it lead to a central bank solvency crisis?

The ETF Profit Strategy Newsletter uses a combination of technical analysis, market sentiment, and common sense to be on the right side of the market. Since the beginning of the year, 78% of our time stamped ETF picks have turned a profit. (through 6/30/13)

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