Posted on 12/12/2008 11:51:18 PM PST by TigerLikesRooster
Bond Bubble Hits Manic Stage
by Michael Pento, Delta Global Advisors, Inc. | December 12, 2008 Print
This week marked the beginning of what I believe is the manic bubble stage in the nearly three decade long Treasury bull market. On Monday, the U.S. Department of Treasury sold $27 billion of three month bills at a discount rate of .005%. That rate is the lowest since the auction began in 1929. On Tuesday, $30 billion of four-week Treasury bills were sold at 0%! Again, the lowest yield ever recorded for that security.
According to data compiled by Bloomberg, 41 U.S. money market funds have daily annualized yields at or less than .05% including four funds with a yield of zero. If one needed more evidence of this epic bubble, you could find it in the fact that a 2-year Treasury note yields just .8% and a 1 year bill offers a paltry .45% as of today’s trading.
Now there are those who are claiming these yields are justified because we are entering a Japanese-style lost decade of deflation—Merrily Lynch’s chief North American economist David Rosenberg was espousing that belief just this morning on CNBC’s Squawk Box. What Mr. Rosenberg chooses to ignore is that Japan has a tradition of one of the highest rates of savings on the planet. And while their virtual zero interest rate policy may not have caused runaway inflation domestically, it has served to inflate asset prices across the world due to the Yen carry trade.
Many who claim that there is justification for today’s bond yields are the same folks who claimed back in 2006 that home prices had never before in history declined on a national level and any talk of a bubble in real estate was therefore nonsense. Many of them are also the same people who assured you in the year 2000 that prices of internet stocks were fairly priced because they should be valued by the number of eyeballs that view a webpage.
To receive zero percent interest after loaning your money to the government for one month is ridiculous. Even more absurd is to hand over your money for 10 years and receive just 2.64% per annum. In order to believe you will receive a real rate of return on that trade, you have to assume the rate of inflation will average far below the after tax return on that bond--well below 2%!
The fact is, Treasury issuance is set to increase dramatically as our annual budget deficits are projected to be well north of $1 trillion dollars for at least the next few years. Along with the increasing debt supply, there is a huge increase in potential inflation from the expansion of the Fed’s balance sheet and a Fed Funds rate that is quickly approaching zero. Those two factors alone paint a very ugly picture for the direction of bond prices. Manias can last a very long time and become more extended than reason should allow. But wise investors should eschew owning Treasuries and continue to accumulate inflation-sensitive assets, despite their recent corrections; fundamentals are clearly on their side.
“To receive zero percent interest after loaning your money to the government for one month is ridiculous.”
And yet millions of people do this yearly, GIVING Uncle Sam their hard earned cash while salivating over a ‘tax refund’ at the end of the year and planning a vacation somewhere warm with their own, returned, ‘worth-less’ cash! *Rolleyes*
When I was in the military, we were CONSTANTLY bombarded to buy Savings Bonds directly from our paychecks each month. No, thanks! Even way back when my money was working harder for me than a Savings Bond ever could.
How sad to practically FORCE military members to support the Government with their hard-earned dollars!
Check out The Vice Fund, first link on the left. One of my favorites to recommend to contrarian investors like me.
The last thing people give up in hard times are liquor, lottery tickets and cigarettes. The last thing the Government usually cuts is defense. Well, with THIS upcoming administration, I’m not to sure about that, but the other ‘vices’ will make up for any loses there.
People will definitely be drinking more if they lose all of their money, and we all know how much our new President just LOVES his Kools, LOL! :)
I’m with you, 100%. Our gold & silver have quadrupled in 10 years’ time. Dad & I invested out inheritance from Grandpa, and he’s smiling down on us right now, I’m bettin’! :)
vfiix
WHAT?
My Bond fund lost as much as my equities fund. Can you explain that one?
How 'bout that? Your own mini hedge fund!!!!!
I’m confused. Is this really a “bubble?” I think it is more of a flight to safety without a particular expectation of financial growth. For example, I had my broker move all my 401K out of mutual funds and into treasury back securities the day before the election. I really didn’t care what the return would be, so long as the face value didn’t crash and was backed by “the full faith and credit” of government. (Whatever that means with a Marxist at the helm.) How can you call it a “bubble” when the value is virtually fixed and the return on investment is going down?
one word. Management.
Seriously, though, alot of it depends on what kind of bonds you have in the portfolio. Some of the lower graded bonds have done horribly, as the public perception of them being able to pay dividends and principle is that some of them may not be able to pay at all. Would you buy GM bonds right now?
US Treasuries are what we are talking about. Perceived safety.
Sure. Anytime you have to pay lots more for the value of an item in order to get it becasuse of a strong inflow of money, it is a bubble. You are just (understandably) confused about valuation of the bonds because they don't "pay" any more than they did before. Just think of the interest rate as an inverse of the sale price (it really is). then you see the valuation bubble. Hope that helps.
Peter Schiff comments: http://caps.fool.com/blogs/viewpost.aspx?bpid=119092&t=01000420523245711617
You’d be way dam better off investing in Spaghettios!!
Ok, thanks. And the way this “bubble” bursts is in a reduction in the value of the dollars invested — inflation.
I get it!
Jasonc, if you’ve got a minute, can I get your opinion on this Peter Schiff article?
BFL.
After years —last 8 years—of investing according to all the “brilliant” strategies, diversify, bond allocation etc. I feel taken by these experts!!
I will have to now even more aggresively manage my own portfolio..that is really look at the funds I am investing in. My puny 1 yr old 401k did fantastic..cause I didn’t have time to ‘invest” it in stocks yet. ha. \
I will take my holidays time to learn more. Also I will be hanging up my laundry to dry instead of running through the dryer and eating more homemdae soup. ha. Yet, my dog Lola refuses to go down to generic doggie biscuits!! but then, she is head of the household so no argument there.
The limit on FDIC-insured CDs is now $250,000, not $100,000.
You lose a little in liquidity, when compared to Treasuries, but not much.
vbmfx
Bonds not bond funds. Equities, not equity funds.
yitbos
my investments were in bond funds....and also stock (equity) funds.
It was a realtively short term bond fund which should have been more conservative than my value stock fund. so I was going with what the “experts” said, have a portion in bond funds to offset the stock funds if the market gets hit.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.