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? 

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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.

For larger chart, click here.

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

The iShares Barclays 20+Yr Treasury Bond ETF (TLT), 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) ahead by +24.38% and the Direxion -3x Treasury 20+Yr Bear ETF (TMV) 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?

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