The options market is reminding investors there's a cure for rising bond yields - higher yields

By Robert Ross

The MOVE Index - the Treasury market's 'fear gauge' - has reached heights that in the past suggested yields may have peaked, at least for now

There's so much fear about rising bond yields, that it may actually be time to bet that yields will fall.

A 35-year-old reader of my newsletter asked me an unusual question this week: "Should I start buying Treasurys?"

A few years ago, there's no way that thought would've crossed his mind. The returns on stocks had simply been too great during his investing journey to accept a paltry 3% yield.

But as he grew more risk-averse and the 10-year Treasury yield BX:TMUBMUSD10Y rose over 5%, the math started to make sense. Not only can you lock in 5% in annual income from the U.S. government, but if yields fall, you can benefit from significant capital appreciation as bond prices move inversely to yields.

That combo got his attention. But after what I told him about the MOVE Index, it made his decision even easier.

Meet the bond market's 'fear gauge'

Most investors know the Cboe Volatility Index VIX, Wall Street's so-called "fear gauge" for stocks as it tends to rise when the market falls.

The MOVE Index, or the ICE BofA U.S. Bond Market Option Volatility Estimate Index, serves a similar purpose for the Treasury market, as it measures expected volatility in U.S. government bonds based on options pricing.

And right now, it's sending a compelling message.

'High yields become the cure for high yields.'Robert Ross, founder of TikStocks

The MOVE recently climbed above 110, its highest level since the height of the Iran conflict in mid-March. A reading of 100 corresponds to the options market pricing roughly six basis points of daily movement in Treasury yields over the following month. One basis point is 0.01 percentage point.

In plain English, the bond market is nervous.

To me, that spells opportunity.

When the VIX spikes above 30, that has historically been the kind of environment where long-term investors should start looking for opportunities rather than running for cover.

The MOVE Index can be viewed through a similar lens. When it pushes above 100, it tells us fear and uncertainty in the Treasury market are unusually high. Historically, these periods of elevated volatility can create attractive entry points for bond investors.

I view this time around as one of those signals. And it's not the only reason to think yields are peaking.

High yields eventually attract buyers

One of the simplest forces in financial markets is also one that investors tend to forget: High yields become the cure for high yields.

As Treasury yields climb, the pool of willing buyers gets larger. Think about a retiree sitting on a $2 million portfolio. At a 2% yield, $2 million generates only $40,000 per year before taxes. The math gets more appealing at 5.3%, as the same sum generates $106,000.

And retirees aren't the only buyers - pension funds, insurers, foreign institutions and even younger investors suddenly have a reason to take Treasurys seriously. And we're starting to see this appetite reveal itself in the Treasury auctions.

On Wednesday, the 10-year Treasury yield surged as high as 5.364% before the government auctioned $39 billion of 10-year notes.

Demand was strong. The auction drew $2.77 in bids for every $1 of bonds being sold, well above the recent average. Indirect bidders, which include foreign institutions, took more than 80% of the issue, while primary dealers were left with just 2.5%. Yields subsequently retreated from their highs.

That is exactly the dynamic I want to see: the higher yields climb, the more attractive Treasurys become, pushing bond prices up and yields down. That tells me we're getting close to a level where investors stop asking how high rates can go and start asking how much they should buy.

But there are a few factors I want to see fall into place before I get too aggressive.

Three signals I'm watching now

I am not calling an exact top in Treasury yields. Instead, I'm looking for confirmation.

First, I want to see the MOVE Index keep trending lower. That tells me bond-market volatility is cooling as investors become more comfortable with the current rate environment.

Second, I want to see Treasury yields stop making "higher highs" even when the market gets bad inflation, oil or geopolitical news. When something stops going down on bad news, that means too much negativity is embedded in the price.

Third, I want to see continued strong demand at Treasury auctions.

We're starting to see encouraging signs on all three fronts. The MOVE Index has rolled over from its recent spike while Wednesday's Treasury auction showed strong demand. But if next week's inflation data comes in hotter than expected and yields fall, I'll begin deploying more capital.

The key word here is "more," as I'm already positioning for a peak in yields. The easiest way to do this is to buy a long-duration Treasury vehicle like the iShares 20+ Year Treasury Bond ETF TLT.

But for more aggressive investors, I'd watch for a "snap back" in assets like growth stocks, shares of small-capitalization companies and other investments that are sensitive to interest rates. Income-oriented investments like Enterprise Products Partners (EPD) are interesting here too, while small caps offer the most upside because they are far more exposed when borrowing costs surge.

In my next issue of "Let's Analyze," I'm going to break down three assets poised to benefit if yields reverse, including a small-cap stock I've recently been buying. Click here to have the full report sent directly to your inbox when it goes live.

Because if the recent action in the MOVE Index and Treasury market is telling us anything, it's that we may be getting closer to a peak in yields. Considering the market is always forward-looking, the move in these beaten-down asset classes will come long before most investors realize it.

And I don't intend to miss it.

Robert Ross is the founder of TikStocks and author of "A Beginner's Guide to High-Risk, High-Reward Investing." A former chief equity analyst at Mauldin Economics, Ross writes the investment newsletter Let's Analyze on Substack and hosts the weekly "Room to Run" podcast.

-Robert Ross

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10-08-26 1451ET