Yield on US Treasury Bonds Increases, Inflation Looms
I have found out over the years that I have a good nose for large macro trends in the markets. I’m not one of those people who can sit and day trade and make money on tiny market fluctuations because I usually end up on the losing end of the trade.
I can remember at the turn of the century when the NASDAQ broke 5000. It was as if there was a big flashing light saying, this is a bubble and it’s gonna pop! It’s over a decade later and the index is still only slightly above 3000.
I have that feeling again now. I’ve been saying this for a while but I’m going to keep saying it. We are in a heap of trouble.
The yield on the ten-year UST bond broke two percent recently. Why does this matter? Well it hasn’t been that high in a while. Historically it has averaged around 4 or 5 percent before the crisis. You see, the Federal Reserve has been buying US mortgage and treasury bonds to keep interest rates artificially low. This way, the US government can keep borrowing trillions and trillions basically for free. Here we call it quantitative easing. In most banana republicsthey call it printing money. Well, eventually even the Fed runs out of bullets.
And what comes along with all of this printing of money? It’s called inflation, and she will be with us sooner than later. When prices start rising, the Fed has to raise interest rates to slow the rate of inflation. The hope is that they can contain this genie they let out of the bottle years ago. My guess — don’t hold your breath.
Not only does the Fed have to raise rates to slow inflation, they are going to have to get rid of all these extra dollars they have pumped into the economy to help Obama get reelected.
Interest rates are at almost zero and have no where to go but up. When this happens our economy is in for a major shock.
In 1994, investors who thought they were safe owning bonds and bond funds lost 30 percent of their assets when the Fed started raising interest rates. I had just started in the business and can remember vividly the wailing and gnashing of teeth. History may not repeat itself but it sure could rhyme.
But wait, there’s another problem. We owe over $16 trillion in debt. When interest rates rise, we are not going to be able to afford to service our debt. More and more of our assets will be used to pay our creditors rather than fix our roads, buy tanks, and do other projects. But I guess we won’t worry about that because we are only going to borrow over a trillion dollars a year for the next decade.
So what did Bill Gross of PIMCO, the manager of the largest bond fund in the world, just do? He sold US treasury bonds. He sold a lot of them. The train has left the station.
My advice? Sell bonds, sell stocks, and buy something you can touch. As they said out west during the depression, “Ma, there’s a storm a comin’!”
Article originally published on The Brenner Brief.