The Worst of the Bond-Market Bust Is Yet to Come

It’s been only 33 days — barely more than a month — but in that time, bonds have crashed in spectacular fashion.

Check out these stats:

• The yield on the 10-year Treasury note, the benchmark used to price virtually every longer-term bond and fixed-rate mortgage, exploded to 2.27 percent from 1.6 percent.

That’s a move of almost 70 basis points, or more than 40 percent, from recent lows. To put that in perspective, that’s like the Dow Jones Industrial Average surging by more than 6,000 points or gold jumping by $550 an ounce.

Any bond-market selloff is bad for bondholders. The problem is that this one couldn’t come at a worse time.

• The iShares High-Yield Corporate Bond and SPDR Barclays High-Yield Bond ETFs together account for more than $24 billion in investor assets in the high-yield, or “junk,” bond market. They gave up every penny of gains racked up during the past eight months in just a few weeks.

• Or how about this: The Vanguard Total Bond Market Index (BND) is a mammoth store of bond-market value, with a whopping $117 billion in net assets. It owns more than 5,800 bonds spread across a wide range of bond sub-markets.

And you know what? It just sank to the lowest level since July 2011.

Just look at this horrid chart and you can see that the Vanguard Total Bond Market Index violated a key level of horizontal support, and an uptrend that dates back to the summer of 2009. If this were a stock, you’d already have sold it.

Click for larger version

30-Year Bull Market Ends

There’s absolutely no doubt in my mind that we’re in a serious bear market for bonds. And if you listen to everyone from Warren Buffett to PIMCO’s Bill Gross to the Federal Reserve’s own Richard Fisher, this is no short-term bear. Instead, it’s a massive secular reversal from the 30-year bond bull market that started in the early 1980s.

How bad could the pain get? Just consider what Jim O’Neill had to say. The former chairman of Goldman Sachs Asset Management, who was once rumored to be in the running for the leadership post at the Bank of England, told Bloomberg this week that “there could be quite ugly days” ahead.

He added that “when the game starts to change with central banks, it is inevitable bonds are going to suffer.” Forget about 10-year yields of 2 percent or so, according to O’Neill. Start looking for yields roughly double that, he said.

Me? That’s precisely the kind of interest-rate surge I’ve been worried about. It’s why I have done everything but climb on top of the Weiss Research building and shout from the rooftops: “Sell bonds!”

 ‘Bond-zi Scheme’ Finally Unravels

Any bond-market selloff is bad for bondholders. The problem is that this one couldn’t come at a worse time because investors have been piling into bonds like never before in the history of the U.S.

I even coined a new term for the buying frenzy and the central bank print-fest that drove it — calling it an unfettered “Bond-zi Scheme” in my February issue of Safe Money Report. In that issue, I noted that investors had poured $671 billion into bond funds since January 2010, while pulling almost $300 billion out of stock funds.

I added that corporations sold a whopping $350 billion in junk bonds last year, more than double that of the entire mid-2000s — right before the last credit bubble burst. And I pointed out that bonds were more relatively overvalued than at any time in the past 92 years.

I’m pleased to know that warnings like those gave you a huge leg up on the rest of Wall Street. They enabled you to sell when bond prices were high and dodge the major sell-offs we’re seeing now. Unfortunately, many investors didn’t pay attention — and now they’re running for the hills.

The evidence? Lipper just reported that investors yanked a whopping $9.1 billion from bond mutual funds and exchange traded funds in the first week of June. That was the worst week of outflows going all the way back to October 2008.  As a refresher, that was when the U.S. capital markets completely imploded — and when the Dow lost more than 3,000 points in a matter of days.

I’m not going to mince words here. The world’s central banks have spent the past few years manipulating the interest-rate markets to a degree we have never seen. It’s been the biggest monetary experiment in history. But now there are signs it’s backfiring, with unintended consequences reverberating through the capital markets.

So I recommend you do what I’ve been telling my subscribers to do. Take some profits off the table. Make sure you’re hedged against a bond-market catastrophe. And consider specialized investments that rise in value right alongside interest rates.

Until next time,

Mike

P.S. As a frequent reader of my Money and Markets columns, you were well-prepared for this breakout to 14-month highs in Treasury yields. You were not one of the panicked sellers dumping bonds more aggressively than at any time since the October 2008 credit-market meltdown.

So now you have the opportunity to turn lemons into lemonade — to go for serious profits as interest rates surge and select investments rise right along with them. All the details — and more — can be found in my new special report, “Beating the Bond Bubble: 6 Bubble-Busting Investments for Income and Profit!”