How to Trade the Spike in Interest Rates

Interest rates are spiking higher.
 
While most of Wall Street is sidetracked watching the meteoric rise in Apple shares, there’s an even bigger move happening in the long-term interest rate market. Look at this chart of the 30-year Treasury bond yield
 

 
The chart broke out of an ascending-triangle pattern (the blue lines) late last week, and interest rates rallied from 3.2% to almost 3.5% in just three days. That’s a gain of nearly 10% – or almost twice what Apple shares have done over the same time frame. And there’s more to come…
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Yesterday, interest rates ran up to resistance at 3.5%. That’s last October’s high, and it’s a natural spot for the up-move to take a break. Rates could chop back and forth here for a while… or they could come all the way back down to retest the previous resistance line on the chart at 3.2% and still maintain the bullish pattern.
 
Fixed-income investors should consider using a move back down to 3.2% as a chance to move out of long-term bonds. Traders could use a move back down as an opportunity to go short the Treasury bond market by either buying puts on TLT – the long-term Treasury Bond ETF – or shorting TLT shares themselves.
 
With interest rates breaking out of the ascending-triangle pattern, the chart projects a move up to about 3.8%. But if rates really get cooking, we could see the 30-year yield rise back up to where it was last July – at about 4.3%.
 
Here’s how that sort of a move would affect shares of TLT…
 

 
This is basically the flip-side of the 30-year yield chart. Since bonds and interest rates move opposite each other, a breakout on the interest rate chart shows up as a breakdown on the bond price chart.
 
TLT broke down from a descending-triangle pattern (the blue lines) and is now resting on the support of its October low at $110. If interest rates spike up to 3.8%, the pattern projects a move down to $102 for TLT. If rates run up to 4.2%, we could see TLT trade all the way down to $95. So there’s plenty more room on the downside.
 
Keep in mind… TLT could bounce in the short term and retest its former support near $115 per share. If that happens, it would set up an ideal case for a short sale.