Stocks and bonds are two completely different areas of the market. One (stocks) gives investors exposure to risk while the other (bonds) is relatively safe.  Why should investors who want absolutely nothing to do with the bond market keep an eye on Treasuries? Matt Krantz of USA Today states that Treasury prices are so important because they put a floor under investment expectations because of their safety characteristics.

Watching the yields on Treasuries gives investors an indication of how other investors are feeling about the overall markets.  If investors are flocking to Treasuries, which drives yields down, it’s a signal of fear in the markets.

Treasury yields also enable investors to identify a required rate of return.  For example, if the yield on a Treasury, a relatively riskless investment, is 3.5%, then one would need to require a return on investment greater than this to take on any risk.

Among the many Treasury ETFs investors can look at are the following:

• iShares Lehman 7-10 Yr Treasury Bond Fund (NYSEArca IEF)
• Vanguard Extended Duration Treasury ETF (NYSEArca EDV)

For more stories on Treasuries, visit our Treasury category.

Kevin Grewal contributed to this article.

Several economists believe that a rise in interest rates could potentially undo the recovery of corporate profits and the housing sector, two areas that equity investors have been banking on as they bid stock prices higher.  This could potentially be detrimental and send the markets in another downward spiral.

To add fuel to the fire, a surge in interest rates makes it harder for individuals to obtain mortgages and fattens up an already outrageous amount of debt held by the federal government, adding costs to the taxpayer.

Now that we know the effects of a hike in interest rates, what exactly is causing it?  Michael Cosgrove, a Dallas economist, suggests that interest rates are rising because the fear factor in the global economy is starting to fade. There is also a huge supply of Treasury debt that is coming to the market, reports Mark Trumbull of the Christian Science Monitor.

The concept is fairly simple.  As investors become more confident in the stock market, they buy up more equity and less government debt.  This causes government borrowing rates to increase.

Most recently, the interest rates on a 10-year Treasury note have shot up from 2.93% in April to 3.68% on June 1 and yields on Treasuries continue to edge upward. As a result, some prominent investors have gone as far as to say that the Treasury market is in a bubble and will soon burst.

• iShares Barclays 7-10 Yr US Treasury ETF (IEF): down 7.9% for the year and has a yield of 3.8%

• Vanguard Extended Dur Trsy Idx ETF (EDV): down 35.8% for the year and has a yield of 3.9%

Kevin Grewal contributed to this article.

The latest program is shelling out $1.5 trillion from the Treasury, private investors and Federal Reserve in an effort to restore the faith in the baking system and giving hope to voters and lawmakers, report Edmund Andrews and Stephan Labaton for The New York Times.

Geithner’s main promise was transparency for the public in regard to the bailout money and tighter accountability for banking institutions that receive rescue money. His multi-pronged program includes:

• The new program, the “bad bank” program, is to buy up hard-to-sell assets that have bogged down banks and financial institutions for the past year. $250-$500 billion is expected to be spent.
• Direct injections into banks up to the remaining $350 billion of the rescue plan money.
• A huge lending program that is aimed at getting consumers the loans they need; $1 trillion will be supplied to regain liquidity into the area of student loans, car loans and credit card debt.

Dakin Campbell and Matthew Brown for Bloomberg report that upon this news, the Treasuries rallied due to the prognosis that the plan would simply not be enough. The safety of the government is the path investors felt was cautious.

Geithner said the Obama administration will fight a “two-front” battle to jump start the economy by stimulating employment and bolstering financial markets. The United States will sell a record $32 billion of three-year notes today. This may help cut consumer borrowing costs. The yield on a 10-year note was down 0.11%, to 2.88%.

• Vanguard Extended Duration Treasury ETF (EDV): up 12.7% over past three months; down 4.9% over past week

Swiss banking giant UBS lost $6.9 billion, or 8.1 billion francs, for the fourth quarter, as they continued to write down assets and many wealth management clients left. This was a bigger hit than analysts had anticipated, and the bank now has a plan to mend.

UBS said it would split its wealth management business into two units with one focusing on clients in the Americas and another on Switzerland and the rest, reports Julia Werdigier for The New York Times. Net money inflows were gained in January, and the bank is hopeful that full profit will be achieved by next year.

• iShares MSCI Switzerland Index (EWL): down 12.4% over past three months; UBS 5.1% of assets

Investors are always on the lookout for that new money-making deal that would help fill their lonely pockets with a fistful of cash, but those who choose incorrectly may have even lost the pants that those pockets were in.

According to John Spence for The Wall Street Journal, 2008 was not a kind year for traders investing in:

• SPDR S&P 500 (SPY): dropped 37%
• iShares MSCI EAFE Index Fund (EFA): dropped 41%
• PowerShares FTSE RAFI Emerging Markets Portfolio (PXH): dropped 45%
• ProShares Ultra Financials (UYG): dropped 85%
• iShares Dow Jones U.S. Home Construction (ITB): dropped 43%
• Commodities and material ETFs also took a beating. Most notably, oil ETFs and exchange traded notes (ETNs) that saw that drop of oil to below $40 a barrel. United States Oil Fund (USO) dropped 56%.

The important thing for investors to keep in mind is that some of the most beaten-down sectors will have the best opportunities for a recovery later. Some real bargains are lurking around the markets right now, so eye these funds and see if they move above their trend lines before you consider whether they’re right for you and your goals.

On the flip side, there are those lucky few who did not choose lemons in 2008 and profited with ETFs and ETNs such as:

• ProShares UltraShort S&P 500 (SDS), a leveraged, bearish fund designed to short the market, gained 61%.
• Long-term Treasury bonds sensitive to rate changes benefited from near zero Fed rate cuts. Vanguard Extended Duration Treasury ETF (EDV) gained 55%. iShares Lehman 20+ Year Treasury Bond Fund (TLT) gained 34%. SPDR Lehman Long Term Treasury ETF (TLO) gained 24%
• Currency ETFs that tracked the weakness of the dollar to other currencies also benefited. iPath JPY/USD Exchange Rate ETN (JYN) gained 23%. Rydex CurrencyShares Japanese Yen Trust (FXY) also gained 23%.

Overall, markets greatly shrunk in volume, but investors still continued to invest in ETFs. Market turmoil is also said to raise questions regarding ETNs and their innate credit risks for investors.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

The asset numbers for both exchange traded funds (ETFs) and mutual funds in 2008 are finally out. While mutual funds had a terrible year, the picture was a little rosier for ETFs and exchange traded notes (ETNs).

In many ways, despite a severaly volatile and depressed economy, the market for these fast-growing investment tools actually flourished:

• Net flows, which compare redemptions against creation activity, moved in the opposite direction as those of traditional open-end mutual funds. ETFs attracted nearly $178.4 billion in net inflows for the year, whereas $320 billion were pulled out of mutual funds, states Murray Coleman of Index Universe.
• ETNs showed net inflows of slightly over $2 billion in 2008, with $823 million coming in December.
• Growth minded investors turned towards bond ETFs, the Vanguard Extended Duration Treasury Index ETF (EDV) posted gains of over 50% last year.
• ETF assets only fell 13% as compared to a decline of 38.5% for the S&P 500, reports Matt Hougan of Index Universe

The month of December was the crème-de-la-crème for ETFs. Overall, industry assets for all U.S.-based ETFs gained around $50 million, and the big players in the industry like iShares and State Street’s SPDRs saw record inflows.

The SPDR Index 500 (SPY) lead the pack, showing an increase in net assets of about $16 million, followed by the iShares MSCI EAFE Index (EFA), which actually got hammered last year, but still managed to grab almost $3 million in inflows, reports the National Stock Exchange.

This seems to be the beginning of a trend for ETFs. As the market makes a comeback, ETF assets and traders will only continue to grow. After all, there are several advisors and traders who still don’t utilize ETFs.

Mutual funds didn’t fare so well, though.

Many believe that the numbers represent the worst showing yet for the industry at large. Although there was a late-year rebound, there is not much hope for the disaster that is looming ahead. Joe Morris for Ignites reports that worldwide, mutual funds are reporting outflows at $320 billion, with equity funds losing $233.5 billion, bond funds $58.2 billion and balanced funds $28 billion, according to Emerging Portfolio Funds Research.

The strongest sectors were utility funds, which were down 36.4%, with four trading days left in the year; health-care funds, which were off 25.2%; and short-bias funds, up 36.2%, according to Lipper data.

Brett Arends of The Wall Street Journal gives us some areas to keep a close eye on in 2009, for better or for worse.

• Municipal Bonds: Some are paying as much as three times as much as Treasuries, on a taxable basis; they will either be a gold mine or a huge money pit. Take a look at the iShares S&P California Municipal Bond Fund (CMF), which has crossed both its 50- and 200-day moving averages.

• GAP (GPS) is a cheap retailer with a solid balance sheet, it is trading around six times cash flow and yielding 2.6%.  Perhaps take a look at Retail HLDRs (RTH) if you’d like exposure. GPS is 2.6%, and it has crossed its 50-day moving average. 

• Long Treasury: Many investors have rushed into treasuries for their safety, but a 30-year yields a measly 2.63%; everything but Depression-style deflation will hurt these bonds. Keep an eye on the Vanguard Extended Duration Treasury ETF (EDV), which is above its 50- and 200-day moving averages.

• Precious Metals: Governments are borrowing and printing money like crazy, which is terrible for paper money and great for precious metals. Take a look at silver, a bit cheaper than gold, more specifically, the iShares Silver Trust (SLV), which has crossed over its 50-day moving average. 

• Homebuilder stocks: If there is any recovery in the housing market, it may start with the homebuilders, which are still down 85% from their 2005 peaks, which history has shown as a good indicator to buy. Still – watch the trends. Recent history has shown that recent history doesn’t always apply. Take a look at the iShares Dow Jones U.S. Home Construction Index (ITB), closing in on its 50-day moving average.

• CGM Focus Fund (CGMFX): Fund legend Ken Heenber’s fund tanked this past year and it will be interesting to see how it performs over this new year. Mutual funds have taken a beating overall in 2008. Can they come back? Will investors want to go back? Keep an eye on this industry.

• US Geothermal Inc. (HTM): A leveraged alternative energy play that is high-risk and speculative; it has plenty of cash and is trading at about $0.70 per share. President-elect Barack Obama wants to make alternative energy a priority, which could benefit ETFs related to the sector. Market Vectors Global Alternative Energy (GEX) is a diversified play, and it has crossed its 50-day moving average.

• iShares MSCI EAFE Small Cap Index Fund (SCZ): some believe that the bargains can be found in small Japanese and European companies and it has crossed its 50-day moving average.

• Yen: Japan has been running a massive trade surplus and saving wads of cash, generally good things for a currency.  Keep an eye on the CurrencyShares Japanese Yen Trust (FXY) to see what it does this year. It’s above both its 50- and 200-day moving averages.

 These are all great companies, sectors and funds to watch; unfortunately, no one can read into the crystal ball and tell us exactly how the market will play out. But this year could be an interesting one.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

The Dow Jones Industrial Average ended 2008 with a two-day winning streak, but was still down for the year by 33.8%. It was the Dow’s worst annual performance since the Great Depression was in full force. The S&P 500 this year lost 38.5%, while the Nasdaq fell 40.5%.

This year, 19 of the top 20 ETFs for 2008 were of the short and ultra short variety. The other best-performing ETFs of the year were telling about the state of our economy, too, as they were focused on Treasuries and the Japanese yen.

The strongest ETF for 2008 was the ProShares UltraShort Semiconductor (SSG), which ended the year up 110.9%.

The other top short ETFs this year include:

• ProShares UltraShort Technology (REW), 95.3%
• ProShares UltraShort Russell MidCap Growth (SDK), 94.4%
• ProShares UltraShort Russell 1000 Growth (SFK), 80.8%
• ProShares UltraShort QQQ (QID), 77.3%

Leveraged and short ETFs should be played with ample knowledge by investors who understand their risks.

The other top area for ETFs were those focused on Treasury Bonds, which were a focal point for investors this year as they sought safety from the turbulent markets. In fact, the investor rush to these funds caused yields to hit lows not seen in decades. One auction of short-term Treasuries this month brought a 0% yield – and investors still snapped them up at an unprecedented pace.

The top-performing Treasury ETF was the Vanguard Extended Duration Treasury Index (EDV), which finished the year up 49.3%. This fund seeks to track the performance of an index made up of extended-duration zero-coupon U.S. Treasuries. The yield on this fund is 2.79%.

Other top Treasury ETFs this year returned between 25%-35%:

• iShares Barclays 20+ Year Treasury Bond (TLT)
• SPDR Lehman Long-Term Treasury (TLO)
• PowerShares 1-30 Laddered Treasury (PLW)

The Japanese yen also had a solid year, with two ETFs focused on the currency delivering solid double-digit returns for the year. The Currency Shares Japanese Yen Trust (FXY) and iPath JPY/USD Exchange Rate ETN (JYN) ended 2008 with double-digit returns of more than 20%.

Japan’s Nikkei just closed its worst year ever, down 42%. The stronger yen has no doubt had an impact on an economy that’s already struggling, as it further tamps down demand for exports that have become more expensive to foreigners. Japan’s manufacturers are planning the biggest job cuts they’ve seen in 35 years.

The top long equity ETFs were focused on gold, closing out the year with gains in the low single digits – around 4%.

The Senate approved the bill, and now it’s off to the House, report Julie Hirschfeld Davis and Charles Babington for the Associated Press. Leaders in the House are working quickly to convert opponents of the bill and get it passed by Friday. Both presidential candidates, as well as vice presidential pick Sen. Joe Biden, flew back to Washington to vote “aye.”

Ulli Niemann for Ulli, The Wall Street Bully addresses the question many have been asking: Why $700 billion? Was it based on careful analysis of the markets? A team of economists gathering in secret and crunching the numbers? No. The answer is: nowhere, really. A Treasury spokesman told Forbes this week that “We just wanted to choose a really large number.”

The world’s markets are mixed today as fears about a global slowdown persist, dampening any relief over the Senate’s vote last night, reports Louise Watt for the Associated Press. Britain and France rose, while Germany, Japan, Australia, South Korea and Taiwan fell. It’s perceived as a signal that this bailout isn’t a done deal.

The European Central Bank also left its interest rate unchanged at 4.25% for the 15-nation zone, as inflation worries took precendence over worries about a credit meltdown.

Investors appear to be taking shelter in bonds early this morning, as some of the few ETFs in positive territory midday focus on them, including:

• SPDR Lehman Short-Term Municipal Bond (SHM)
• Vanguard Short-Term Bond (BSV)
• Vanguard Extended Duration Treasury Index (EDV)

ETFs that invest in short-term Treasury bills are known for being one of the safest types of investments. SPDR Lehman 1-3 Month Treasury Bill ETF (BIL) invests in short-term Treasury bills and has an expense ratio of 0.14%, so most of the yield goes into your pocket.

Current yield, which can be calculated here, is an important indicator of a Treasury bill and if it’s a good time to go in. The only disadvantage of an ETF Treasury bill fund is that you have to pay a brokerage commission to buy and sell.

Another plus of buying a U.S. Treasury bill is that they are available straight from the government. So instead of paying retail, you have wholesale access from the Federal government. By buying direct you can reduce the fees that you pay. Vanguard Total Bond Market (BND) touts a 0.11% expense ratio and the annual fee rises only if your bond value rises. Some online brokers give free access to U.S. Treasuries as well, reports Matt Krantz for USA Today.

We think buying bonds through an ETF is the better way to go. Before bond ETFs came along, trying to get this kind of diversification would have been prohibitively expensive for the average investor. Now, they’re accessible to everyone.

There are around 15 ETFs with holdings in U.S. Treasuries. Because the liquidity in the underlying market is sufficient, the U.S. Treasury market is the largest in the world, reports Jonathan Bernstein for Seeking Alpha.

They include:

• iShares Lehman TIPS Bond (TIP): up 4.6% year-to-date
• SPDR Barclays TIPS (IPE): up 3.5% year-to-date
• Vanguard Extended Duration Treasury ETF (EDV): down 3.5% year-to-date
• iShares Lehman 1-3 Year Treasury Bond (SHY): up 2.5% year-to-date

For full disclosure, Tom Lydon’s clients own shares of TIP, SHY.