Bond Market Gets Slammed on Fed Tapering Flip-Flop

You read it here first last Friday. I wrote in no uncertain terms that:

“There is no economic justification whatsoever for the current pace of QE or the current level of interest rates — and that is yet another reason why the ‘no taper till kingdom come’ argument is all washed up.”

Then, later that day, the hammer came down. Long-bond futures prices declined 2 points, while the yield on the 10-year Treasury note surged 14 basis points to 2.75 percent. Those were the single-biggest one-day moves in more than four months.

As a result, all those Wall Street flip-floppers — who did a 180-degree turn on their Federal Reserve tapering expectations only a few weeks earlier — got crushed. Now, they’re doing another 180 and coming around back to the view I’ve held all along. That view? Tapering is coming sooner than expected, Fed protests to the contrary be darned. And mark my words: Short-term rate hikes will then follow, also sooner than expected.

Wall Street flip-floppers who misread the Fed’s tapering expectations got crushed last week.

Why? Pick your reason:

 The asset markets are going ballistic with speculation.

  Interest-rate volatility is rising.

  Negative real interest rates can’t persist as long as they have without creating massive instability.

  The long-term bond market has been plunging in value for more than a year, and the Fed has followed long-term bond yields with short-term rate hikes in every single interest-rate cycle of the past half-century.

But the particular catalyst for the latest bond-market massacre was a stronger-than-expected October jobs report. It showed the U.S. economy created a hefty 204,000 jobs last month, almost double the average forecast of Wall Street economists.

Unemployment did tick up to 7.3 percent, but that was largely tied to the government shutdown. Job gains were fairly widespread by industry, and the previous two months worth of figures were revised higher by the tens of thousands.

Not everything was positive, mind you. The figures on labor-force participation and long-term unemployment were relatively weak. But the positives outweighed the negatives, and they confirm the message I’ve been trying to hammer home for several months now: The economy is not in crisis like in 2008-2009 anymore, and that means crisis-era interest rates and QE policies make absolutely zero sense.

I cannot stress enough how wrong many on Wall Street have gotten the bond market for a span of several quarters. They’ve completely forgotten their interest rate history, or never studied it in the first place. And they’ve been lulled into complacency by five years of Fed Frankenstein financing.

But that era is coming to an end, and you simply have to take steps to protect yourself — and profit — from a rising-rate environment. If we break through, say, 3 percent on the 10-year Treasury note yield, I believe we’ll ramp up to 3.5 percent in a heartbeat. And over the longer term? We could be talking 5 percent.

Do you know how much pain your portfolio will suffer if you’re one of the Americans who poured into bonds at a record pace in the past four years? Are you prepared for a couple years worth of losses in supposedly safe bonds? Because that’s what you’re facing if I’m right and the three-decade bond bull market in bonds is dead and buried.

So, please, get out of your mid-term and long-term bonds and ETFs or mutual funds that invest in them. Stick with floating-rate or low-duration ETFs, funds or individual securities. Use investments like inverse bond ETFs to hedge — or to go for profits — from falling bond prices. And stay the heck away from interest-sensitive stocks, such as REITs and home builders.

As a last step, if you want more specific strategies for avoiding the bond bubble and profiting from other, more promising investments, check out my Safe Money Report. We completely avoided this bond bust by advising our subscribers to get out of bonds before they started crashing — and even helped our subscribers profit from their decline. I’d love to have you on board!

Until next time,

Mike