Best of the Week
Most Popular
1.Will UK Interest Rate Rises Crash House Prices? - Nadeem_Walayat
2.Full on Crash Alert for Major World Stock Markets... - Clive_Maund
3.Gold And Silver Market Bottoming? Big Rally Imminent? Reality Check Says NO - Michael_Noonan
4.The Coming Silver Price Rally Will Outperform All Previous Ones - Hubert_Moolman
5.The Trigger For The Upcoming Stock Crash - Harry_Dent
6.Imploding Department Store Results - James_Quinn
7.Dr. Copper is Speaking, are you Listening? ... - Rambus_Chartology
8.Pandemonium in the Stock Market, Dow falls 1,000 points in a week - EWI
9.Asia's Whirling Dervish of Devaluations Has Encircled China's Exports - Keith_Hilden
10.China Weakens the Yuan; Rattles Global Stock and Financial Markets - Gary_Dorsch
Last 5 days
UK Immigration Crisis Hits New Record, Trending Towards Becoming a Catastrophe - 28th Aug 15
The Ultimate Cash-Management Guide - 27th Aug 15
Why a Fed Rate Hike Could Be a Blessing for Gold Prices - 27th Aug 15
Why Devaluing the Yuan Won't Help China's Economy - 27th Aug 15
Stock Market Trend & Trade Signal Of the Decade - 27th Aug 15
Keep Your Eye On the Gold and Silver Bear - 27th Aug 15
Refugees Expose Europe’s Lack Of Decency - 27th Aug 15
How to Profit from China's Currency War - 27th Aug 15
How China's Currency Policies Will Change the World - 27th Aug 15
Chinese Medicine not Impressing Dr Copper - 27th Aug 15
Novel Biotech Novel Technology Platforms with Dramatic Growth Potential - 27th Aug 15
China Stocks Bear Market Crash, Are We Near the Bottom Yet? - 27th Aug 15
Stock Market Crash Black Wednesday Rally Crushes the Bears - 26th Aug 15
VIX Shorts Being Squeezed While SPX Prepares for Another Decline - 26th Aug 15
Why China's Economy is Deteriorating - 26th Aug 15
Citizenship as a Weapon: Travel Controls and What You Can Do About It - 26th Aug 15
Gold and Silver - How To Manipulate a Market - 26th Aug 15
How to Make a Quick 20% When the Stock Market Crashes - 26th Aug 15
Why We Can’t Handle A Stocks Bear Market - State Budgets Will Implode - 26th Aug 15
Stocks Bear Market, Is This 1929 All Over Again? - 26th Aug 15
The One Trading Strategy You Needed for Stock Market Crash - 26th Aug 15
Second Chance To Buy Cheap Gold Mining Stocks - 25th Aug 15
Gold Facts and Gold Speculations - 25th Aug 15
The Stock Market Crash Season is Here… - 25th Aug 15
Liftoff Setback Leads to U.S. Dollar Pullback - 25th Aug 15
The Stock Markets Are Extraordinarily Volatile, Here's What to Do - 25th Aug 15
Israel: The Case Against Attacking Iran - 25th Aug 15
Saudis Could Face An Open Revolt At Next OPEC Oil Meeting - 25th Aug 15
How to Calmly Weather This Stock Market Downturn - 25th Aug 15
Stock Market Sound the Alarm - 25th Aug 15
Stock Market Meltdown - Dow Monday 1000 Point Crash then Rebound, What's Next? - 25th Aug 15
El-Erian: Stock Market Sell off Is Not 1998 or 2008 - 25th Aug 15
Gold the Ultimate Financial Crisis Insurance - 25th Aug 15
Stock Market Black Monday Crash Fizzles Out, Next Black Tuesday? - 25th Aug 15
Black Monday - Rolling A Wheelbarrow Of Dynamite Into A Crowd Of Fire Jugglers - 24th Aug 15
Playing the Chinese Trump Card - 24th Aug 15
Gold and Silver: Heading for a “Blue Screen of Death” Event? - 24th Aug 15
Japan Economy Clear Conclusions Concerning QE - 24th Aug 15
Stock Market Blockbuster Right From the Open... - 24th Aug 15
Silver And The Petrodollar - 24th Aug 15
Why the Stock Market Sell-Off Happened – and How to Make Money on It - 24th Aug 15
Stocks Correct, Panic Ensues. The End Of The World? - 24th Aug 15
Stock Market - The Sky IS Falling - 24th Aug 15
SP500, DAX, FTSE - When Stock Markets Talk, Pay Attention - 24th Aug 15
Stock Market Black Monday - Full Crash Alert! - 24th Aug 15
Stock Markets Implode as China Literally Explodes - 23rd Aug 15
Stock Market Bloodbath - The Feds Gonna Need A Bigger Balance Sheet - 23rd Aug 15
Stock Market Due For A Breather (But More To Go) - 23rd Aug 15
Stock Market 20% Bear Market in the Works - 23rd Aug 15
Ankara: the New Capital of Jihad, U.S. Policy for Strengthening ISIS - 23rd Aug 15
Will Rising Interest Rates Crash UK House Prices? - Video - 23rd Aug 15
Stock Market Primary IV Underway? - 22nd Aug 15
Gold And Silver – NWO In Its Element: Problem, Reaction, Solution. Beware - 22nd Aug 15
Stock Market Nirvana Has Been Broken - 22nd Aug 15
Three Ways to Profit from the Stock Market Correction - 22nd Aug 15
S&P 2040 Breaks Down... Stock Market Turns Bearish - 22nd Aug 15
Storm Clouds Are Gathering Around Peer-to-Peer Lending Sector - 22nd Aug 15
Crude Oil Price Crash Continues: West Texas Crude Below $40, Brent Near $45 - 22nd Aug 15
Pandemonium in the Stock Market, Dow falls 1,000 points in a week - 22nd Aug 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Stocks Slide

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

© 2005-2015 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

Biggest Debt Bomb in History