Martin
Hutchinson
submits:
We're on a collision course with the worst bond market
collapse in decades.
The warning signs are as clear as day.
There's still time to dodge the damage - and even to
profit - if you know what to look for.
But the time to make your move is now ...
Three Catalysts for a "Total Bond Market
Collapse"
U.S. Treasury bond yields have been only moderately strong
since December, with the 10-year Treasury yield rising from
3.31% to 3.40%. As a result, bonds have been a pretty
unprofitable play for investors. In fact, a 10-year Treasury
purchased Jan. 1 has lost 0.76% of its principal, which
almost wipes out the roughly 1% in interest the bond has
yielded during that same three and a half month stretch.
While that only represents a moderate decline in bond
prices, take heed: That gentle slope leads directly to the
precipice of a bottomless pit - a total bond market
collapse.
There are three key factors that will cause - and even hasten -
the coming bond market collapse. These catalysts are easy to spot -
indeed, they're in the headlines virtually every day.
I'm talking, of course, about monetary policy, inflation and the
federal deficit. Let's take a detailed look at each of these
potential bond-market-collapse catalysts:
-
The Monetary Policy Blues
: U.S. Federal Reserve Chairman Ben S. Bernanke has kept interest
rates virtually at zero (0.00%) for 30 months, with inflation now
showing signs of returning. Since November, Bernanke's been
buying a full two-thirds of the Treasury's debt issuance. He's
not going to raise interest rates anytime soon, which means
inflation will accelerate, mostly through commodity prices. And
when he stops buying Treasuries, where will that leave the
investors?
-
The Inflation Conflagration
:
Inflation
had been running at near zero because of the recession, but in
the last six months the producer price index ((PPI)) has risen at
an annual rate of 10%. That will feed into the consumer price
index ((
CPI
)) over the next few months. At some point, bond buyers will
realize inflation is back and panic. After all, even though
inflation never got above 14% in the 1970s and 1980s, long-term
bond yields got to 15%. For bond
yields
to move that high from here, bond
prices
would have to fall an awfully long way.
-
The Federal-Deficit Follies
: The
real
cost of the $787 billion "stimulus" of 2009 is
the $1.6 trillion deficit we are now struggling
with
. The United States has never run a deficit of anywhere near this
magnitude, and it's becoming obvious that trillion-dollar-plus
deficits are here until at least 2013. That's another reason for
the bond markets to panic - and is another reason to fear a bond
market collapse.
Worse Than the 70s
Combine those three factors, and you're looking at the potential
for a truly epic bond market collapse, worse than anything that we
saw in the 1970s. After all, if bond yields rise 0.25% when the Fed
is buying 70% of the bonds and keeping interest rates artificially
low, those yields will experience a stratospheric zoom after June
30, when Bernanke's "
QE2
" bond-purchase program comes to an end.
If you ask me to bet, I would say the bond market disaster will
start in the third quarter - even CPI inflation figures are likely
to be looking pretty creepy by then. Before then, you will probably
see a continuing creep upwards in bond yields, perhaps reaching 4%
on 10-year Treasuries by early June.
How to protect yourself? Well, obviously gold and silver are
part of the solution, at least until the Fed starts fighting
inflation properly, which I don't expect to happen before next
year.
The other solution is to bet on the bond market collapse itself.
To do that, I'd recommend a look at the ProShares UltraShort
Barclays 20+ Year Treasury Exchange Traded Fund (TBT), which aims
to rise by twice the amount that long-term Treasuries decline. Like
all leveraged inverse funds, this accumulates tracking error if you
hold it too long. However, I don't think we'll have to hold it for
more than a few months this time, so the tracking error should be
modest.
People have been predicting a sharp rise in bond yields for two
years now, and they have been wrong. However, I think those
predictions of a bond market collapse are likely to come true
within the next few months, and when they do, they'll come true
with a bang.
Investors are looking at a bond market collapse, and it could
start in the third quarter. But don't wait until then to adopt
defensive investments. Start positioning yourself now.
The U.S. Federal Reserve's loose monetary policy and the
inability of our elected representatives in Congress to rein in the
U.S. debt load have undermined both the U.S. dollar and the
nation's economic recovery.
There is no safe place to hide, but owning gold and other
precious metals such as silver could go a long way toward
preserving your wealth - at least until the Fed starts fighting
inflation properly, which I don't expect to happen before next
year.
In fact, I would recommend you have at least 15% to 20% of your
portfolio in gold and silver, the traditional inflation hedges.
Of course, the short story is that both metals have
exchange-traded funds that track their price fluctuations - namely
the SPDR Gold Trust (
GLD
) and the iShares Silver Trust (SLV).
The other solution is to bet on the bond market collapse itself.
To do that, I'd recommend a look at the ProShares UltraShort
Barclays 20+ Year Treasury Exchange Traded Fund (TBT), which aims
to rise by twice the amount that long-term Treasuries decline. Like
all leveraged "inverse" funds, this accumulates tracking error if
you hold it too long. However, I don't think we'll have to hold it
for more than a few months this time, so the tracking error should
be modest.
Original post
Disclosure:
None.
See also
Monday Market Calls: The Federal Debt Ceiling and
Treasuries
on seekingalpha.com