Saturday, January 9, 2010

Bond Market Warning

It looks like I am not the only person to be worried about the bond market - specifically the US Treasury market.

Earlier this week, the most successful bond manager of all time - Bill Gross of Pimco - warned about the US Treasury market. This is very important since Pimco has $940 billion under management.

Mr. Gross cut his exposure to US (and UK too) government bonds amid fears that rising government debt could scupper the incipient economic recovery. He fears a big rise in government bond yields, or interest rates, triggered by growing market concerns about US government finances.

Pimco points to the trllions of dollars, literally, in government bond supplies that the United States will be attempting to sell over the next few years. Who will buy this incredible amount of debt?

And Mr. Gross is not alone. Other large fund managers such as Blackrock have warned of the danger of a US government bond market selloff.

The danger I see is that the little guy - the individual investor - has poured money into bond funds at just the wrong time. Flows into bond funds are at an ALL-TIME peak! The main reason for this I believe is their perceived 'safety'.

For everyone who has invested into US government bond funds - they are NOT safe! You can, and at these valuation levels, you will most likely lose money.

Interest rates are near all-time lows, with short-term interest rates near zero. They cannot go any lower than zero...interest rates have only one direction to go - up.

And when interest rates move up, the value of bonds that you hold goes down - you lose money.

I firmly believe that the US Treasury market is the biggest bubble I have seen in all my years of experience in the financial markets. And ALL bubbles, whether it is internet stocks or housing or US Treasuries, eventually burst and the people invested in them get burned.

And like all bubbles, this bubble is based on a myth. Myths like - companies don't need earnings or housing Always goes up.

The myth here is the one called deflation, the scary 'monster' from the 1930s. If we have deflation - prices, earnings and economic activity falling - the only 'safe' investment will be US Treasuries. Thus we have people running for 'safety' and we get 0% Treasury bills.

Even since the financial crisis began, Wall Street economists have warned that deflation loomed and that government policymakers have to take 'bold' action.

Therefore we have the Federal Reserve printing trillions of dollars out of thin air and the US government going trillions of dollars deeper into debt.

The fact that these deeply irresponsible fiscal and monetary policies have funded the "bailout" of the Wall Street banks employing these economists who have spread this deflationary myth is, of course, just a complete coincidence!

Deflation is just a myth conjured up by Wall Street to justify policies that have foisted their losses onto taxpayers, both today's and tomorrow's...and it has succeeded in blowing another financial bubble.

Investors - take the advice of Bill Gross and at the least, lighten your exposure to this financial bubble.


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