The Great Depression Online

Great Depression Online Archive Issue:

You Can Almost Feel It

Great Depression Online
Long Beach, CA
April 16, 2010

Inside This Issue You Will Discover…

*** A Terrible Time to Buy Bonds
*** A New Financial Burden
*** You Can Almost Feel It
*** And More

A Terrible Time to Buy Bonds

Some years ago, back when markets only went up, we asked a purveyor of mutual funds, “when is the best time to buy bonds?”

“Now is always the best time to buy bonds,” he answered.

We found this response to be richly disingenuous – and insightful.  As a “financial advisor” he was right…now is always the best time to buy bonds.  But, remember, your financial advisor doesn’t make money on the quality of the investments he sells you.  Rather he makes money on the transaction fees he charges.

As an investor, now is not always the best time to buy bonds.  What’s more, right now, this very moment, is a terrible time to buy bonds.  That’s our guess at least.

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Recall that when bond yields go up, bond prices go down.  Conversely, when bond yields go down, bond prices go up.  As investors, we want to buy low and sell high.  As bond investors, we want to buy when bond prices are cheap and yields are high.

Right now yields are low and bonds are expensive.

Take Ten Year Treasury yields, for example.  Back in 1981 they were over 15 percent.  Then, for the next 28-years, they slid down a soft, slow, disinflationary slope to a yield of just 2.24 percent in fall of 2008.  Since then they’ve jumped and sputtered their way back to about 3.86 percent.

As you can see they’ve got a lot of room to run up.  Moreover, with all the debt being issued, lenders will want a little more reward for their risk.  

A New Financial Burden

We thought we saw the top in the treasury market back in 2002…and many times since.  Yet now that it’s finally here, we’re indifferent.  Soon, however, we think most American’s will be hardly indifferent; they’ll be getting squeezed by higher interest rates.

“Even as prospects for the American economy brighten,” explained the New York Times last weekend, “consumers are about to face a new financial burden: a sustained period of rising interest rates.

“The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

‘“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates.  ‘“It’s been a great thrill as rates descended, but now we face an extended climb.”’

Rising rates make borrowing more expensive.  That effects mortgage payments, car payments, and consumer credit card rates, among other things.  It also effects Government debt payments.

But that’s not all…

“The long decline in rates also helped prop up the stock market; lower rates for investments like bonds make stocks more attractive.

“That tailwind, which prevented even worse economic pain during the recession, has ceased, according to interviews with economists, analysts and money managers.

‘“We’ve had almost a 30-year rally,” said David Wyss, chief economist for Standard & Poor’s.  ‘“That’s come to an end.”’

This could get painful real quick…

You Can Almost Feel It

At the GDO we’re no longer concerned if the stimulus and money pumping from the Feds will work to reinflate the economy.  Instead we’re worried that it is working.  But instead of pushing up real economic growth, it’s pushing up prices.

Soon interest rates will follow…

U.S. Treasuries yields, you see, are not at a normal equilibrium…but at an epic bubble.  In fact, this could be the inflection point, the moment the great 28-year U.S. Treasury bond bubble finally pops.

If you’ve got a little imagination, you could short 30-year Treasuries by buying the Rydex Inverse Government Long Bond Strategy Fund.  In fact, it trades on the NASDAQ under the ticker symbol: RYJUX.  As government debt wanes, and interest rates rise, you’ll be rewarded while traditional Treasury investors are ruined.

So close your eyes, enlighten your senses, take deep breaths…bond yields are ready to rise, you can almost feel it.


M.N. Gordon
Great Depression Online

P.S.  Here at the GDO we know we often get it wrong.  So, too, we know, we occasionally get it right.  We know because our readers – that’s you – let us hear it…good, bad, or ugly.  Following the last GDO issue, for instance, one friendly chiropractor offered the following…

“M.N. Gordon, What the hell is your bias against chiropractors? We do great work.  For example, in 20 min. last week I CURED a lady of migraine headaches she has had since 1983!  Now she has a life after suffering under the medical model for over 25 years and wasting tens of thousands of dollars.  Your pharmaceutical/medical people KILL hundreds of thousands of people per year in the US.  You make an ass of yourself.”

See what we mean?

So if you got a moment, and feel like offering us your opinion on markets or the economy, advice on this newsletter, or just leaving a good old fashioned rant, just hit reply or click here:  Go ahead – good, bad, or ugly – it’ll make our day.


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