iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT), iShares Lehman 10-20 Yr Tresry Bond(ETF) (TLH), iShares Barclays 7-10 Year Trasry Bnd Fd (IEF): My System Signals It’s Time to Abandon Bonds

We calculated the duration of this portfolio as 12.8, meaning the $10,000 portfolio will lose $1,280 with a 1% rise in interest rates. The risk can then be defined in years of interest, with $1,280 being equal to 5.2 years’ worth of interest payments. ($1,280 / $247.30 = 5.18).

It is important to understand the risk of any position. I believe that risk is so important that I designed the 26-week rate of change (ROC) system, an ETF trading system built to reduce risk. This can lead to extended periods of time in cash when risks are high. Currently, the system is signaling a move to cash in the bonds allocation.

iShares iBoxx $ High Yid Corp Bond (ETF) (NYSEARCA:HYG) has a duration of 4.3. The ETF lost about 4.9% as interest rates rose by 1%. HYG carries some degree of extra risk because high-yield bonds trade with a high degree of correlation to stocks. When investments are highly correlated with each other, they tend to move in the same direction over time.

iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSEARCA:TLT) is negatively correlated with SPDR S&P 500 ETF Trust (NYSEARCA:SPY) while HYG has a positive correlation to SPY. Investors using HYG or similar investments as income investments should understand that risk. This risk is not just theoretical. In the 2008 bear market, iShares iBoxx $ High Yid Corp Bond (ETF) (NYSEARCA:HYG) suffered a loss while TLT provided a gain.

The 26-week ROC system is telling us that there is significant risk in bonds. The trend toward higher interest rates is now firmly established and could continue for some time. It is probably better to avoid large losses than give back years’ worth of income as bond prices fall.

After selling iShares iBoxx $ High Yid Corp Bond (ETF) (NYSEARCA:HYG), the 26-week ROC system portfolio will be holding four positions:

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