FYI | Apr 02 2013
By Michael Lombardi, MBA
In 1980, the total outstanding debt in the U.S. bond market was about $2.5 trillion—this included municipal bonds, Treasury bonds, money market instruments, corporate debt, and asset-backed securities. Fast-forward to 2012, and the U.S. bond market stands at $38.13 trillion—an increase of more than 1,400%! (Source: Securities Industry and Financial Markets Association, March 7, 2013.)
The chart below shows how the U.S. bond market has ballooned over time.
Chart copyright Lombardi Publishing Corporation, 2013;
Data Source: Securities Industry and Financial Markets Association (SIFMA)
As I have written before, I expect the coming sell-off in the U.S. bond market to start slowly; nothing like what we saw when the key stock indices plummeted in 2008 and 2009. It will be slow and steady, gradually picking up speed.
Bond investors are facing two risks in the U.S. bond market: interest rate risk and credit risk.
The Federal Reserve has been keeping interest rates artificially low since the financial crisis began, while printing an unprecedented amount of new paper money in its efforts to boost economic growth. The Fed will eventually have to raise interest rates to tame inflationary pressures. When that happens, bond investors could face extensive losses. A simple rule of economics: bond prices fall when interest rates rise. The U.S. bond market will be no different.
The U.S. government is spending with two hands. It has been posting budget deficits of more than $1.0 trillion for the last four years. It won’t surprise me to see another year with a U.S. budget deficit of more than $1.0 trillion. The U.S. national debt is headed well above $17.0 trillion.
Dear reader, it is not a hidden fact anymore: the U.S. government is spending rigorously, while borrowing from the Federal Reserve to stay afloat. Unfortunately, this type of behavior can only go on for so long before our creditors—the bond investors—realize the Ponzi scheme that’s really happening.
As a result of all this, there is already softening in the U.S. bond market. For example, 30-year U.S. bond prices have been declining since November of 2012, having fallen more than 4.5%.
The glory of the U.S. bond market may just be coming to an end. A hike in interest rates is not that far off now. Gone are the days when the U.S. bond market was the place to be.
We publish Profit Confidential daily for our Lombardi Financial customers because we believe many of those reporting today’s financial news simply don’t know what they are telling you! Reporters are trained to tell you the news—not what it can mean for you! What you read in the popular news services, be it the daily newspapers, on the internet or TV, is the news from a “reporter’s opinion.” And there’s the big difference.
With Profit Confidential you are receiving the news with the opinions, commentaries and interpretations of seasoned financial analysts and economists. We analyze the actions of the stock market, precious metals, interest rates, real estate and other investments so we can tell you what we believe today’s financial news will mean for you tomorrow!
© 2013 Copyright Profit Confidential – 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 mereliable, 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.
Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
