Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Correct into Bitcoin Happy Thanks Halving - Earnings Season Buying Opps - 4th July 24
24 Hours Until Clown Rishi Sunak is Booted Out of Number 10 - UIK General Election 2024 - 4th July 24
Clown Rishi Delivers Tory Election Bloodbath, Labour 400+ Seat Landslide - 1st July 24
Bitcoin Happy Thanks Halving - Crypto's Exist Strategy - 30th June 24
Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes - 30th June 24
Gold Mining Stocks Record Quarter - 30th June 24
Could Low PCE Inflation Take Gold to the Moon? - 30th June 24
UK General Election 2024 Result Forecast - 26th June 24
AI Stocks Portfolio Accumulate and Distribute - 26th June 24
Gold Stocks Reloading - 26th June 24
Gold Price Completely Unsurprising Reversal and Next Steps - 26th June 24
Inflation – How It Started And Where We Are Now - 26th June 24
Can Stock Market Bad Breadth Be Good? - 26th June 24
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Buying Bonds is a Bad Idea

Interest-Rates / US Bonds Nov 17, 2010 - 02:36 AM GMT

By: Richard_Daughty

Interest-Rates

Best Financial Markets Analysis ArticleIf there are two things that you can count on, it is that you have got to be pretty quick to get the last piece of pizza before I snag it, and that I am never remiss in telling people that buying bonds at these insanely-low yields is the Exact Wrong Thing (EWT) to do.

Unfortunately, my latest "student" was the cashier at the grocery store, who, it turns out, knows absolutely squat about what bonds are, although she admits that she has heard the word before.


Predictably, the conversation went nowhere until I commented about how prices are higher, and she says that a lot of customers are complaining about the higher prices.

Seizing the opportunity, I said, "That's because the foul Federal Reserve has been creating so many trillions of dollars for so many years! And now the Fed is going to create that much money every freaking year so that the Fed can use it to buy up the $2 trillion in bonds that the Treasury will have to float this year so that the Obama administration can deficit-spend it, which is so freaking much money pouring into the economy that it will make prices go up even more than they have!"

I thought I saw a glimmer of interest in her eyes at my brilliant synopsis of the situation in the way she kept nervously glancing over her shoulder at the manager so that he could, I assume, come over to share in this interesting conversation.

Encouraged, I continued, "And it is this inflation in prices that will make people say 'Buy bonds? Screw that!' and not buy bonds because they yield so little while inflation is so high, which means that if they buy the bonds that yield less than the rate of inflation in prices, they are actually losing money in the form of lower buying power!"

I looked directly at her to let her know that I was coming to my terrific summation, which is, "And that means that the bonds will have to yield more to attract buyers, which means that the prices of bonds will go down, handing an unrealized (at best!) capital loss on the owner of bonds! Now do you see why buying bonds is a bad idea?"

I looked at her expectantly, hoping that she would say, "Wow! Now I understand! Thanks for the information, Brilliant Handsome Stranger (BHS)! But, since you're so smart, how can I make a profit on this terrific analysis?" whereupon I would have told her to buy gold, silver and oil stocks.

But she didn't. She just looked at me with this stupid bored look on her face and, handing me the register tape, said in a monotone, "That'll be $138.62."

Perhaps she would have been more impressed by Mark Lundeen's Bear's Eye View (BEV) analysis, which contains the highly interesting facts that "Bond valuations in 2010 are obscenely inflated, with bond yields far below actual consumer price inflation. This is a highly unstable situation, very similar to the bond market of 1938 to 1981, a period when money invested in the bond market purchased only tickets to poverty. This is what happened as bond yields rose from 3% to 15%, while rising consumer prices gnawed away at the purchasing power of fixed income investments."

"Aha," I thought! "Even she could not fail to be impressed with the fact that the last time this happened, bond yields rose 500%!"

And that would be before her reading where he says, "Beginning in 1981, with the 30-year US Treasury Bond at record high yields of 15%, bonds began a 30-year bull market, just one year after gold began its 21-year bear market. But beginning in 2001, something very strange happened: gold and bond yield trends decoupled. For the past decade, rising gold prices sounded the siren of problems to come in the global financial markets, even as the bull market in bonds continued for an additional 10 years."

The best part is when he says, "As a matter of financial survival, bond yields should have been raised with the price of gold for the past 10 years, exactly as happened from 1969-80!" but that, ominously, they did not, and he goes on that while bond prices have not risen even as gold was signaling trouble of the inflationary kind aplenty, "I assure you that someday soon they will."

And the inflation that should be driving bond yields up and bond prices down, and which will soon be driving bond yields up and bond prices down, also means that gold, silver and oil will gloriously rise, rise, rise along with it, too, making it all so wonderfully easy that one will involuntarily gleefully shout, "Whee! This investing stuff is easy!"

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning, and other fine publications.

Copyright © 2010 Daily Reckoning

© 2010 Copyright The Daily Reckoning - 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.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Rick
17 Nov 10, 09:57
T-Bonds: A Money Losing Proposition

No one is disputing that purchasing T-Bonds at the present time is a money losing proposition. However, these securities may merit a second look at some point as their yields could prove to be attractive. However, it's exactly that time when these bonds again gain favor with the investor would likewise provide the impetus for the U.S. Treasury to 'call back' those securities.


Post Comment

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