INTEREST RATES REPRESENT

the mother of all markets. From stocks and

to

and

, there isn't an investment in the world not directly affected by the price of money. Given that unmatched influence, all investors should not only follow the bond market but also employ some basic intra-market analysis to better understand how to protect assets and perhaps even make a buck in the process.

Before rising housing prices became the de facto conversation at cocktail parties, it was bonds that were said to be in a bubble. For much of 2002 and 2003, many investors avoided fixed income, sitting instead in money markets for fear of owning bonds once rates began to rise. Yet the trend persisted and rates dropped significantly lower than even most economists had forecast. For example, the yield on the 10-year Treasury, as high as 7% back in 1996, traded near 3.5% during 2003 and dipped below 4% as recently as late June.

As I always point out, the best indicator of the market is the market itself. And although the Fed has been raising rates since June 2004, it's only in the past few weeks that I've begun to believe an actual change in the general trend of interest might be under way. A chart is not a Ouija board that can mysteriously foretell future prices, but a recent and pronounced jump higher in yields does suggest a new range might soon be established.

A useful tool in getting a handle on Treasury yields are the Chicago Board Options Exchange's interest-rate options, whose underlying indexes provide a quick and easy way to evaluate yields. Ticker symbol TNX, for example, which is based on the most recently auctioned 10-year Treasury, was recently quoted at 43.92, equating to a 4.39% yield. Other indexes include IRX (13-week Treasury), FVX (five-year Treasury) and TYX, which tracks the yield on the soon-to-be reissued 30-year TreasuryDelayed quotes are available at the CBOE web site

Strategies conceived by observing the CBOE's indexes can be executed in the capital markets by using one of the now ubiquitous bond exchange-traded funds, first covered in this space three years back.

No chart tells you where a market is going, only where it's been in the past. But with the recent run-up to 4.4%, one can look at the yield on the benchmark 10-year Treasury and make a legitimate argument that the market is poised to break out of the roughly 4.0% to 4.5% range it's inhabited for much of the past two years. Nobody knows the future, but it goes without saying a move back to 7.0% is much more probable with the market showing a tendency to push higher in the channel. Even beyond the action in yields, there are a few bits of supporting data that compel me to believe that this time things might be different.

As regular readers know, I've recently re-established positions in loan-participation funds, also known as bank-loan or floating-rate funds. First mentioned almost two years ago, the fundamental characteristic of these securities is that they hold short-term loans whose rates periodically reset. This makes them one of the few income-oriented investments that can actually do well in a period of rising rates.

Despite tightening by the Federal Reserve, the group has actually fallen over the past year, with leaders like Van Kampen Senior Income, ING Prime Rate Trust, Citigroup Investments Corporate Loan and Nuveen Senior Income dropping between 6% and 10%. Recently, however, that decline has reversed. Synchronized group movement, persistently higher price action and quiet outperformance have all led me to once again put money to work. Because markets tend to anticipate news and not reflect it, I'm also prone to believe floating-rate funds' newfound strength is a harbinger that recent Treasury yield ranges soon will likely be violated to the upside.

Also, the fact that many of the floating-rate funds trade at a discount to their net-asset values, or NAVs, gives me some element of confidence that the big-money move hasn't yet been made. For example, most of the newly popular covered-call funds, which outperform in trendless markets by selling call options, trade at 3% to 5% premiums to their underlying net-asset values. Attraction to the strategy has prompted historically low volatility levels and record options volume on all major exchanges.

And while most floating-rate funds have strengthened recently, shares in many interest-rate-sensitive instruments might have begun to finally crack. Mortgage real-estate investment trusts, or REITs, in particular have been decimated, with names like Anworth Mortgage Asset, MFA Mortgage Investments, Luminent Mortgage Capital, Impac Mortgage Holdings, Bimini Mortgage Management and Annaly Mortgage Management all either at or near multimonth lows.

This is an ominous sign for utilities, which have served as a venerable gravy train since I began writing about them last September. Year-to-date, the Dow Jones Utility index is up 18.20%, and while I haven't completely exited the sector, last week's drubbing has prompted me to avoid taking new positions and hedge a few of the larger ones that I already have.

Why so cautious? Just take a look at the chart at the bottom of this page. Over long periods of time, the yields of the 10-year Treasury and the Dow Jones Utility Index have moved in near lockstep. If the cycle toward lower interest rates has ended, then it's likely the multi-year run in my beloved utilities has as well. To that end, prudence dictates that stop-loss orders in portfolios heavily tilted toward utilities be set and judiciously followed, just in case this 800-pound gorilla has finally been put to rest.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in some of the securities mentioned in this article.