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I was in Las Vegas last week for the MoneyShow — and let me tell you, it was a blast! I enjoy meeting subscribers face to face, and I really appreciate the tough, probing questions that were asked of me.
A common theme?
You were curious about debts, deficits, and what they mean for interest rates. You wanted information on where they’re headed, and how interest rate volatility would impact your investments. So I focused on that very topic during my live presentation last Thursday.
But I also recognize that you may not have been able to make the trip to Vegas. So I’m going to recap the major points of my presentation now just to make sure you don’t miss out. I trust you’ll find this briefing extremely valuable!
Why I Have Every Reason
to Worry About Bonds
First off, I laid out why I worry so much about bonds. The main points: Interest rates and the cost of money drive the entire economy … so-called “experts” don’t realize how fast and far rates could rise … and most importantly, investors are hugely overexposed to a bond market crash:
- In February 2009, a net $16.8 billion went into bond mutual funds. Stock funds lost $24.9 billion.
- In August 2009, bond fund inflows swamped stock inflows by a ratio of 11 to 1.
- In September 2009, bond inflows were $47.7 billion; Stock outflows were $10.2 billion.
- December ETF flows showed the same trend; bond ETF inflows surged 87 percent year-over-year while domestic stock inflows rose just 28 percent.
Second, I debunked the notion that Treasury bonds — long-term ones, that is — are always “safe.”
They lost 30 points in price between January 1979 and February 1980 … 21 percent between September 1993 and November 1994 … and 30 points again between December 2008 and June 2009.
Third, I laid out …
Four Powerful Forces That Should Fuel
a Treasury Bond Crash
Force #1:
Deficits Are Out of Control
The massive budget deficits we’re running. The deficit came to $1.4 trillion, or 9.9 percent of GDP, in fiscal 2009. And the Obama administration recently predicted a $1.6 trillion deficit — 10.6 percent of GDP — for 2010.
Those are much worse than the peak deficit during the Great Depression (4.8 percent of GDP), when the government was also aggressively fighting an economic downturn.
Worse, the deficits are STRUCTURAL rather than CYCLICAL. So even if the economy recovers, we won’t get back below the “3 percent of GDP” level considered fiscally responsible.
Force #2:
Treasury Supply Is Exploding
To fund those massive deficits, we’re issuing mammoth amounts of Treasuries. Net issuance came in at $2.1 trillion in 2009 and it’s on track to hit $2.5 trillion this year. Benchmark debt auctions are now running at $120 billion or more per week, and the total government debt load is set to double to $18.6 trillion over the next decade.
Also frightening:
- Two-year note auctions used to be $18 billion a month. Now they’re $44 billion.
- Five-year notes auctions were $13 billion; they’re $42 billion now.
- Ten-year sales were $8 billion; now they’re $20 billion.
- And 30-year bond sales — which were abandoned completely for a few years — are back up to $16 billion per month.
Force #3:
Sovereign Debt Risk Is Surging
A PIIGS-style, sovereign debt crisis is brewing in the U.S. The underlying problems of massive debts and deficits aren’t unique to Portugal, Ireland, Italy, Greece, and Spain. They’re problems were facing on a massive scale here in the U.S.
Indeed, I said the PIIGS countries aren’t pigs. They’re “canaries” in the coal mine for U.S. bonds!
Force #4:
Fed Policymakers Are Running Amok
Federal Reserve policymakers are running amok again. They’re printing money and keeping interest rates pegged to the floor. The “real” (inflation adjusted) federal funds rate is -1.85 percent, thanks to a nominal rate of 0.25 percent and a year-over-year Consumer Price Index change of 2.1 percent.
The last time we had negative real rates for an extended period, we had the biggest housing bubble in U.S. history. Yet here we are again, with the Fed repeating the same policy mistakes.
My Treasury Targets —
and How to Capitalize on Them
Finally, I noted that the 10-year Treasury yield hit a low of 2.06 percent in December 2008. It was recently around 3.5 percent, and my intermediate term target is 5.5 percent. There’s an outside risk of hitting the 2000 high of 6.8 percent.
For the long bond futures, we hit a price high of 143. We’re trading around 122 today. My intermediate-term target is down around 100, with outside risk all the way down at 82.
As for corporate, municipal, and junk bonds, I recommended investors sell if they’re in long-term securities. Rising interest rates will cut a swath through those bonds as well as Treasuries.
Most importantly, I told investors about the tools they can use to protect themselves — and profit — from falling bond prices and rising interest rates. I discussed several exchange traded funds, mutual funds, and various futures and options strategies that will pay off handsomely if I’m right about where rates are headed.
It’s too late for you to catch my live presentation. But it’s not too late for you to get the inside scoop on those vehicles — or to grab the special MoneyShow discount I offered attendees on my new interest rate service. If you’d like to learn more, just click here.
Until next time,
Mike
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Dinesh Kalera, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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