Bonds

• Rising bond prices mean falling yields. The price you pay for a bond is in inverse proportion to the bond’s yield, the interest rate that you collect as long as you hold the bond. As the price rises, the yield falls. Trends and events that are good for bonds, such as slowing economic growth or stable inflation, make the price rise and the yield fall.

• Bonds hate inflation. If you buy a bond that’s supposed to pay you 5 percent for ten years, and inflation is running at 1 percent per year, you’re getting a 4 percent return. If inflation climbs to 2 percent peryear, your investment return has been cut by 20 percent.

• Commodity prices affect the bond market. Generally speaking, rising commodity prices are inflationary and lead to falling bond prices and rising yields. The most important commodity in this regard is oil, but other commodities, such as agricultural and industrial commodities, are also important to watch. Bond yields generally rise in response to higher commodity prices. Yet that relationship can sometimes change. The dip in bond yields evident in the latter part of the chart is due to the market expecting the global economy to slow in response to the burden placed upon it by higher commodity prices.

• The effect of a weak currency is variable on bonds. A weak currency can be negative for bonds, especially if it’s weakened because of a rising money supply, in which case it’s inflationary. However, a weak currency because of an underlying weak economy is not usually inflationary, at least not until the money supply reaches the critical stage at which it becomes inflationary. That tipping point is variable in every cycle.

• Bond traders like slow growth or negative economic growth. I think of bond traders as mini versions of Ebenezer Scrooge. They like misery. And the worse things get, the more bond prices rally and yields fall. A depression is, in theory, the best scenario for bonds — at least for treasury bonds — as long as the government is standing and meets its debt obligation.

Economic Reports that affects bonds market

• The employment report: Bond traders usually focus on the number of new jobs created and the general trend of wages. Big numbers in both of these categories of the report tend to be bearish (negative) for bonds and lead to lower prices and higher yields.

• Consumer Price Index (CPI): Big numbers are bearish; small numbers aren’t always bullish but tend to be better.

• Producer Price Index (PPI): Especially if the number is way above or below expectations, this one can move the bond market.

• Consumer confidence: Consumer confidence can be a major mover if the market is at a significant juncture, and especially if the data falls in line with other data that’s available at the time the numbers are released. In other cases, the bond market simply ignores it, no matter the number.

• Gross Domestic Product: As they do with employment, bond traders look for strength here. Big numbers, especially in a component known as the GDP deflator, signal the potential for inflation. Weak numbers, or numbers that don’t suggest big inflation, are generally benign

Two ETFs in particular are excellent for bond timing: The I-shares 20+ Year Treasury Bond Fund (TLT) lets you time the long side, as prices rise and yields fall, and the ProShares UltraShort U.S. Trust ETF (TBT) lets you time the short side, as prices fall and yields rise. See the upcoming section “Finding the right time for bonds.”