Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
Is the Tech Stock Market Bloodbath is Finally Here? - 28th Jun 17
Crude Oil Sinks 20%: Why "Oversupply" Isn't the Half of It - 28th Jun 17
Important Money Management Tips For Teenagers - 28th Jun 17
The Coming Battery Bonanza - 28th Jun 17
Overlooked Stock Investments To Keep An Eye On in 2017 - 27th Jun 17
The Federal Reserve And Drug Addiction – A Prediction - 27th Jun 17
Charts Show Why Emerging Markets Will Be an Essential Part of Your Portfolio Going Forward - 27th Jun 17
Former Lehman Brothers Trader: I Bet My Reputation That Stocks Bubble Will Pop In A Year - 27th Jun 17
US Bonds and Related Market Indicators - 27th Jun 17
Stocks At Record Highs: Market Sentiment Still Bullish - 27th Jun 17
Stock Market Running Out of Steam - 27th Jun 17
Gold Back With A Vengeance As Bitcoin Bubble Bursts - 26th Jun 17
Crude Oil Trade & Nasdaq QQQ Update - 26th Jun 17
Gold and Silver Ongoing Consolidation May End Soon - 25th Jun 17
Dollar May Become “Local Currency of the U.S.” Only - 25th Jun 17
Sheffield Great Flood of 2007, 10 Years On - Unique Timeline of What Happened - 24th Jun 17
US Stock Market Correction Could be Underway - 24th Jun 17
Proof That This Economic Recovery Narrative is False - 24th Jun 17
Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - 24th Jun 17
Gold Summer Doldrums - 23rd Jun 17
Hedgers Net Short the Euro, US Market Rotates; 2 Horsemen Set to Ride? - 23rd Jun 17
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

Are Stock Market Investors Being Set Up For Another Fall?

Stock-Markets / Stock Markets 2010 Jul 30, 2010 - 01:10 PM GMT

By: Sy_Harding

Stock-Markets In the early 1930’s, after the 1929 crash, Wall Street could not get nervous investors interested in stocks again. However, with interest rates dropped to extreme lows in the Great Depression, those who still had money were eager to invest in something that would provide more income than they could receive on savings accounts. As a result Wall Street had no trouble selling them bonds.


It was later said to have been a slower disaster than the stock market crash, but almost as devastating. Bonds decline in price when interest rates and yields rise. Over the next two decades interest rates began to rise from their extreme lows, and the price of bonds declined. Investors new to bonds discovered it was not a safe haven to be receiving 4% annual interest on bonds if the bonds were dropping 10% in price annually due to rising interest rates.

I bring that up because of reports this week that the major U.S. banks are on a tear to raise huge amounts of low cost capital by issuing bonds while rates are at record lows, and while investor demand for higher returns is on the rise as an alternative to stocks. Some of the low cost capital being raised is being used to pay off the higher cost bonds and debt on their books. Moody’s estimates that U.S. banks have already refinanced $200 billion of the $372 billion in debt that is coming due in 2010.

The Financial Times quotes an executive with one of the big banks as saying, “There’s a bit of a food fight among investors to get hold of paper from U.S. banks.” (It’s not the same situation in Europe where banks need to raise capital but are struggling to issue new debt in the midst of the Eurozone debt crisis).

The large U.S. banks are not the only corporations having an easy time issuing new bonds, benefiting from the flight to safety. Investors have been piling into corporate and treasury bonds for quite some time, and it continues. The Investment Company Institute, which tracks money flows in retail mutual funds, estimates that individual investors pulled another $9 billion from U.S. stock funds in the first three weeks of July, even as the stock market was rallying again, and poured $20 billion more into corporate and government bond funds.

Tom Lee, chief U.S. equity strategist at JP Morgan Chase, speaking at the Reuters Investment Outlook meeting in New York on Wednesday said that, “Retail investors buying bonds today, at a time when the supply of corporate bonds is shrinking . . . they’re chasing a bubble.”

Assuming the issuer does not default on its bonds, an investor will not lose money on individual bonds if they are held to maturity, when the issuer returns the borrowed money to the investor. However, holding to maturity may be difficult, as bond investors discovered in the late 1930’s and 1940’s, once stocks begin producing 10% to 25% in some years, while the 20-year corporate bond will continue to pay only 4.5% or whatever annually to maturity (and meanwhile may be significantly underwater until maturity due to rising interest rates).

As Tom Lee of JP Morgan also said Wednesday, “Have Americans ever been satisfied with earning a steady but low rate of return? What we have in American history is rolling from bubble to bubble, whether it’s stocks, real estate, commodities, emerging markets, time shares . . . when one bubble bursts they are moved to the next one.” Lee implies that the bubble currently forming is in bonds.

But it should be okay as long as the Fed holds interest rates at record low levels near zero for “an extended period of time” as they say they will, and particularly if the stock market has another leg to go on the downside (keeping the appeal of safe havens alive). But investors probably need to be aware of the potential that it is a bond bubble, and be prepared to bail out early when rates and yields begin rising, or if the stock market bottoms and begins a new leg up. With so much money in bonds and bond funds, the exit doors will be crowded when the time comes.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- 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.


© 2005-2017 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

Catching a Falling Financial Knife