I have been warning about bonds now for over 6 months. Finally the press is catching on, ensuring that a normal development over the course of a business cycle (whether ignited by natural forces or government intervention) – rising interest rates – might cause investors to panic. Even Warren Buffet has delicately sent up a warning flare in his TV interviews suggesting the worst investment at present is a long term government bond.
And there’s this too:
Over at UBS, a plan is being discussed to reclassify bond investors as “aggressive” investors…UBS is planning a mass mailing to many of its brokerage clients alerting them that they have been reclassified as “aggressive” investors following a recent change in its market outlook that some people inside the firm say reflects growing bearishness in the bond market, particularly over the long term, the FOXBusiness Network has learned… (thank-you for this quote Stephen Bishop of Nova Scotia).
This is scary, but makes sense. If interest rates rise, taking down the valuation of bonds on the balance sheets and assets under management rapidly, then banks and insurance companies (loaded up on bonds during and post-financial crisis) will be hit with more financial woes. They all scrambled back then to reduce risk, but are discovering belatedly that at the drop of a hat they added more risk than they bargained for. What’s the best way to get clients to trim their bonds and bond funds? Have compliance make the security unsuitable.
I’ve been warning about this since last summer….the question is not ‘whether rates will rise’ because in reality the trend (see chart for US Treasuries) has been slowly but unequivocally UP for awhile, especially at the long end of the yield curve.
What happens when everyone wants out all at once? Watch the below video.
What we risk is turning what was a bond bubble into another stock bubble. As I suggested in my previous commentary the stock market has to go higher as money flows (funds from gold exchange-traded fund or ETF redemptions, proceeds from bond sales) gotta go somewhere, and they’ve been moving into the stock market with gusto for many months now. My target was another +10% for the S&P 500 to get to fair value, but markets have a tendency to overshoot (hence to term ‘bubble’) don’t they?
There’s no shame in beating the others – like George in the video – out the door (selling bonds) but it may be wise at this stage to hold onto cash rather than dive into the stock market full tilt. Look for an opportunity to buy back some bonds at higher yields during the summer and top up stocks when the next correction comes.
Maverick Investors Rally Site 