Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Treasury Bonds Nowhere To Go But Down

Interest-Rates / US Bonds Apr 22, 2010 - 11:11 AM GMT

By: Sol_Palha

Interest-Rates

Best Financial Markets Analysis Article"It is better to do thine own duty, however lacking in merit, than to do that of another, even though efficiently. It is better to die doing one's own duty, for to do the duty of another is fraught with danger." ~ Bhagavad Gita, BC 400-, Sanskrit Poem Incorporated Into the Mahabharata


A lot of noise is being about the economy improving and even if things do continue to get better, there is a rather strong head wind building in the horizon. Interest rates have been slowly but surely rising over the past few months and given the current trend, it appears that the bond market has nowhere to go but down.

Our ballooning debt and inflation are labelled as the main culprits.

"Americans have assumed the roller coaster goes one way," said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. "It's been a great thrill as rates descended, but now we face an extended climb."

The housing market which experts state has just started to recover (our personal opinion is that it's a long way from mounting a sustainable recovery) is going to be the first one to get knocked down and dragged down for years to come. Mortgages rates are trading close to 52 week new highs and given that the Fed has ended its $1.25 trillion program to purchase mortgage debt, rates will be subject to even more upward pressure.

30-Year T-Bond Yield

The above chart clearly illustrates that bond yields have been rising for quite some time and one can quite confidently state that mortgage rates have bottomed. The Green circle represents the madness that hit the bond markets when investors panicked and flocked into bonds in the late 2008 to the early 2009 period. If rates can stay above the 4.75-4.90 ranges for 12 days in a row or close above this level twice on a weekly basis, it will mark the beginning of a new bull market in rates and long bear in bonds.

Christopher J. Mayer, a professor of finance and economics at Columbia Business School goes on to state "Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home". Thus any hope of a long term recovery in the housing sector is going to be short lived as higher rates will effectively lock out more and more individuals from purchasing a home.

Factors that will create further pressure on bonds and the economy

Auto loans are going to become more expensive; in fact, rates have already been rising. Higher rates here will in turn have a negative impact on the auto industry and this short lived spurt of higher sales could soon be followed with a prolonged drought.

The credit card industry is another sector that is going to take a hit. Rising rates are going to make already skittish consumers even more reluctant to take on new debt. As our economic growth is based on consumers taking on more debt, this will knock the fragile recovery right of its feet.

Washington will soon have to pony up more when it tries to borrow the money it needs for the social programs it has in mind. The outflow of funds from the bond into other investments is also contributing to the rise in rates. If bond investors were to panic and run out of bonds as they dove into them back in the 2008-2009 time period, it could have a massive impact on rates. China has been a net seller of late, and if China started to aggressively unload its holdings, it could result in a complete meltdown.

Bill Gross the bond king has reduced US bond holdings by a significant amount; 9 months ago PIMCO total return fund had invested over 50% of its assets in US debt, today the ratio has dropped to roughly 30%. This is the lowest level in the fund's 23 year history.

2 weeks ago the treasury auctioned of $82 billion in debt at a rate of roughly 4%. This is twice as much as they paid towards the end of 2008 and early 2009 when investors flocked into Bonds looking for safety.

Mortgage rates peaked in 1981 at 18.2%; this works out to a monthly payment of roughly $3100 in comparison the current payment of 1100 on a $200,000 mortgage.

Total household debt is almost 10 times what is back in the early 80's and yet the percentage of disposable income that goes to servicing ones debt has not increased much over this time period? The current household debt is $13.8 trillion and disposable income is roughly $11 trillion; a deficit of roughly $2.8 trillion.

Gross debt by the end of the first quarter was almost 88% of GDP. Our gross debt has increased at a rate of roughly $500 billion every year since 2003, and then it went ballistic in 2008 and 2009 where $1 trillion and $1.9 trillion were added respectively.

Richard Fisher The president of the Dallas Federal reserve stated in May 2008 that the National debt was close to $100 trillion; an excerpt of the full speech is pasted below.

Why is the Medicare figure so large? There is a mix of reasons, really. In part, it is due to the same birthrate and life-expectancy issues that affect Social Security. In part, it is due to ever-costlier advances in medical technology and the willingness of Medicare to pay for them. And in part, it is due to expanded benefits -- the new drug benefit program's unfunded liability is by itself one-third greater than all of Social Security's.

Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.

I want to remind you that I am only talking about the unfunded portions of Social Security and Medicare. It is what the current payment scheme of Social Security payroll taxes, Medicare payroll taxes, membership fees for Medicare B, copays, deductibles and all other revenue currently channeled to our entitlement system will not cover under current rules. These existing revenue streams must remain in place in perpetuity to handle the "funded" entitlement liabilities. Reduce or eliminate this income and the unfunded liability grows. Increase benefits and the liability grows as well. Full Story

One should definitely pay attention when one of the Fed heads starts to talk especially when what they have to say actually makes sense. It is now 2010, so the figure is now definitely well above $100 Trillion. Add in the $1 trillion health package, and all the other social programs announced since and the number goes up even more.

Conclusion

Bonds have only one place to go and if one is kind one will use the word down, but the fact is that the bond market is a disaster waiting to happen. At some point in time it is going to experience a horrific correction/crash as the only way this government will be able to borrow the billions and trillions of dollars it will need one day is by paying huge interest rates to bond holders.

Long term players can use rallies in the bond market to short bonds via TBT. Precious metals perform very well in a high rate environment so an even better option would be to have a position in Gold and Silver bullion. One must also seriously consider the possibility of hyperinflation; under this scenario having a stake in precious metals is an absolute must, for they will at least prevent you from ending up in the dog house.

"If I had a formula for bypassing trouble, I would not pass it around. Trouble creates a capacity to handle it. I don't embrace trouble; that's as bad as treating it as an enemy. But I do say: meet it as a friend, for you'll see a lot of it, and had better be on speaking terms with it." ~ Oliver Wendell Holmes, 1809-1894, American Author, Wit, Poet

by Sol Palha

www.tacticalinvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

© 2010 Copyright Sol Palha   - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in