Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16
The Peak Oil Paradox Revisited - 19th July 16
SPX Challenges the Upper Trendline - 19th July 16
Missing ’28 Pages’ of the 9/11 Report Released into Blitzkrieg of World Events - 19th July 16
Likelihood of Organized Disruption at GOP Convention - 19th July 16
More on the ‘Breadth Thrust’ and Stock Market Internals - 19th July 16
FX Traders: Get a Free Week of Forecasts (Details inside) - 19th July 16
Ups and Downs in Gold and Crude Oil Price - 19th July 16
Keep an Eye on ‘Bitcoin’ as the Next ‘Financial Crisis’ Starts! - 18th July 16
Erdogan Might Have Known about the Coup but Didn’t Prevent It on Purpose - 18th July 16
More Deflation Ahead: Silver, Gold And Their Mining Stocks A Must-Have - 18th July 16
Stock Market Minor Top? - 18th July 16
5 Best Gold and Silver Junior Mining Stocks in 2016 - 17th July 16
Gold And Silver – NWO-Created Tragedies Will Never End, Seek Truth - 16th July 16
How Long Can Buybacks Continue To Support A Market Which Is Standing On A Fundamentally Flawed Premise? - 16th July 16
Will They Come For Your IRA? - 15th July 16
Gold’s Record Selling Overhang - 15th July 16
Capitalism Has Entered a New Era—and Historic Stock Market Investing Returns Are Gone Forever - 15th July 16
Gold Price Could Hit $5,000 or Even $10,000 in a Few Years - 15th July 16
Junior Gold and Silver Mining Funds or Individual Gold and Silver Mining Stocks - 15th July 16
The Soaring Risk of Flying in Bernanke's Helicopter - 15th July 16
The Broad Stock Market, Helicopters and Gold - 15th July 16
The Curious Case of Vanishing Lady Liberty; Only Gold and Silver Remember Her - 15th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Forex Forecasts

How to Prepare for the U.S. Treasury Bond Market Apocalypse

Interest-Rates / US Bonds Aug 05, 2012 - 04:52 AM GMT

By: Investment_U

Interest-Rates

Best Financial Markets Analysis ArticleAlexander Green writes: The Wall Street Journal made an interesting observation recently, “Treasury bonds are priced for the end of the world.”

It was a news article, not an opinion piece. But it happens to be the viewpoint of virtually every investor with half a brain – or a modicum of common sense. A few months ago, for instance, the world’s best-known investor, Warren Buffett, wrote in his annual letter to shareholders, “Right now bonds should come with a warning label.”


Yet I routinely talk to investors who still don’t get it. Treasuries are safe they tell me. And the historical returns are quite good, especially compared to the pittance money markets are paying.

Both of these statements are true. But it still makes little sense to plunk for 10-year bonds that pay 1.5% or 30-year bonds yielding 2.5%. And if you’re holding an investment-grade bond fund whose yield is much higher than this, you really need to hit the exit in a hurry. Here’s why…

The World is Not Ending
Let’s start with the fact that Treasury yields are at all-time record lows. Why is this? Inflation is modest. Uncertainty is high. The U.S. may sink back into a recession. The wheels may come off the euro. Uncle Sam seems like a safe bet.

And from a credit standpoint, U.S. Treasuries – even without their vaunted AAA rating – are indeed among the world’s safest securities. Sure, a few blue-chip companies have higher credit ratings. But that could change. Plus, they aren’t able to crank up the printing presses to repay their corporate debt. And some other countries have been fiscally responsible enough to maintain their AAA-ratings. But most don’t have the economic strength, political stability, or military might to attract large capital flows.

Lend the U.S. government money and, yes, it will certainly pay you back. But two dangers loom: inflation – the great bugaboo of bond investors everywhere – and, ahem, the world’s not ending.

Let’s take inflation first. Consumer prices are fairly low, unless you’re looking at healthcare costs (or health insurance premiums) or putting a kid through college. The CPI was 1.66% for June, down from 3.56% a year ago. That trend could easily reverse, however.

Oil, for instance, tumbled more 20% in the first half of the year. But it has moved back up almost as quickly lately. If inflation ticks higher, bond prices will sink lower. Even a half-point rise in inflation could cause 10-year Treasuries to fall 5%. And that might be just the beginning. If you don’t know what happened to bond prices in the early 80s, you owe it to yourself to learn what happens to fixed-income investors when inflation and interest rates suddenly move higher. It’s not pretty…

“If It’s in the Papers, It’s in the Price”
Then there’s that matter of the world not coming to an end. I hear investors recite a litany of woes that beset the global economy today. But every one of these things – anemic GDP growth, currency problems in Europe, the already leveraged consumer, and so on – are already priced into stocks. As the old Wall Street saw reminds us, “If it’s in the papers, it’s in the price.”

As for those bond funds that, despite their high expenses, sport hefty yields, look out below. Many of them are highly leveraged – the bond equivalent of buying stocks on margin – and when bonds head south their shareholders will get routed.

It hasn’t happened yet. But it almost certainly will. In the meantime, with inflation at 1.6% and 10-year yields at 1.5%, bond investors are already earning a real negative return on their money.

What’s the point of owning an investment with very little upside potential and huge downside risk? Govern your portfolio accordingly.

Good Investing,

Source : http://www.investmentu.com/2012/August/treasury-bond-apocalypse.html

by Alexander Green , Oxford Club Investment Director Chairman, Investment

http://www.investmentu.com

Copyright © 1999 - 2012 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2016 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