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I believe the bond market is an accident waiting to happen. The more it
is delayed, the more the pain it will lead to.
Here's a chart of 30yr bond yield (it was introduced in 1977, so the
chart presents the entire history)
http://finance.yahoo.com/q/bc?s=^TYX&t=my&l=off&z=l&q=l&c=
Right now the ONLY reasons that it doesn't correct, is
1) foreign central banks (of Japan and China) are intervening to support
the plummeting dollar, throwing billions into US bonds (I've done a
chart with the dates and amounts of intereventions and the impact on
JPY-USD and bond markets -- the week after the Japanese stopped
intervening in March-2004, bonds crashed losing >10% of their value in
40days, which is a HUGE 100bp move). The Japanese and Chinese now have
accumulated over $1 trillion in US treasuries, which are losing value
everyday as dollar sinks further. For how long more they can keep losing
and ADD to losing positions, I have no idea!
2) the leveraged carry trade played by funds with other people's money.
Basically the fact that real interest rates have been negative for so
long (blame the Fed for that) has "forced" fund managers to take extreme
risks in the "search for yield" (there was a recent paper by Bank of
England on this issue and the implications to the stability of the
system (i.e. new LTCMs in the making)
Personally I find it unbelievable the the Fed is doing this to the
American people, EFFECTIVELY DOUBLING DOWN the stock bubble of the late
1990s. This policy of too much credit, has inflated all asset classes
(real estate, stocks etc) and when the inevitable correction comes, the
pain will be much greater for everyone.
What would be better: if Nasdaq composite topped at 5,000 or 15,000 ?
People/investors should get IMMEDIATELY out of longer-term bonds (10yr
and 30yr ones) at these valuations. Get out of any bond funds in their
IRAs. If they absolutely HAVE to have US bonds in their portfolios, they
should buy shorter-term bonds (2yr or 5yr MAX) or TIPS (which are
inflation-protected, but as explained Fed "steals" from those bond
holders because it mis-reports true inflation). Or buy "reverse bond
funds" (which gain as interest rates rise). Until real interest
rates stop being NEGATIVE.
Traders could ofcourse short bonds.
Hope this helps. As I explained (see charts below of Japanese
intervention vs bond yield/price), this is an accident waiting to
happen.
M
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