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Bond Market: Something Wicked Cometh This Way
Mar. 4, 2014 1:04 PM ET | 2 comments | Includes: GOVT, PLW, TRSY by: Profit Confidential

Bond Market: Something Wicked Cometh This Way [iShares Trust, PIMCO ETF Trust] - Seeking... http://seekingalpha.com/article/2066533-bond-market-something-wicked-cometh-this-way?sour...
1 of 7 3/5/2014 8:59 PM
The bond market is in trouble.
As we all know, the Federal Reserve has been the biggest driver of bonds since the financial crisis. The central bank lowered its benchmark interest
rate to near zero, then started quantitative easing, all of which resulted in the bond market soaring as yields collapsed to multi-decade lows.
The chart below will show you what has happened to the U.S. bond market since the mid-1970s.
As you can see from the chart, the declining yields on bonds stopped in the spring of 2013 and have increased sharply since then.
(click to enlarge)
Chart courtesy of www.StockCharts.com.
What's next for bonds?
The Federal Reserve is slowly taking away the "steroids" that boosted the bond market. The central bank is now printing $65.0 billion of new
money a month instead of the $85.0 billion it was printing just a few months back. And now we hear the Federal Reserve will be slowing its
purchases by $10.0 billion a month throughout 2014.
Since May of last year alone, when speculation started that the Federal Reserve would cut back on its money printing program, bond yields
skyrocketed and bond investors panicked.
According to the Investment Company Institute, investors sold $176 billion worth of long-term bond mutual funds between June and December of
last year. (Source: Investment Company Institute web site, last accessed February 26, 2014.) I would not be surprised if withdrawals from bond
mutual funds are even bigger this year.
Bond Market: Something Wicked Cometh This Way [iShares Trust, PIMCO ETF Trust] - Seeking... http://seekingalpha.com/article/2066533-bond-market-something-wicked-cometh-this-way?sour...
2 of 7 3/5/2014 8:59 PM
And China is slowly exiting the U.S. bond market, too. According to the U.S. Department of the Treasury, in December, China sold the biggest
amount of U.S. bonds since 2011. In December, the country reduced its U.S. bond holdings by $47.8 billion, or 3.6%. It now holds $1.27 trillion
worth of U.S. bonds. (Source: Bloomberg, February 18, 2014.)
When I look at the bond market, I only see risk. The Federal Reserve - the key backer of lower bond yields over the past five years - is pulling back
on its money printing program, which was what had fueled the bond market's rally in the first place. And we have China pulling back on its
holdings of U.S. Treasuries, too. So, who will buy U.S. Treasuries if both the Fed and China are pulling back on buying them? Won't rates on bonds
need to rise in order to attract more buyers to them?
I'm afraid the bond market is setting up for an imminent sell-off. And while many retail investors take the bond market lightly, a falling bond market
will have a massive negative impact on the stock market and the housing market - a caution for investors.
Disclosure: None.
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Comments (2)
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gggl
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Comments (3740)

About this article
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Bond Market: Something Wicked Cometh This Way [iShares Trust, PIMCO ETF Trust] - Seeking... http://seekingalpha.com/article/2066533-bond-market-something-wicked-cometh-this-way?sour...
3 of 7 3/5/2014 8:59 PM
I think it is safe to say that for the last 2 years the experts have all been pretty much clueless on bonds. Likely this is due to the reality that
we are in a deflationary environment when everyone seems to be expecting the opposite.

If we look back to post 2009 with the ZIRP we managed to get down to right around 4% 10 year rates. Then QE drove interest rates even
lower. So without QE and ZIRP one would think 4% would be the natural levels for 10 year rates to rise to. However with the EU unable to
force interest rates higher (it would destroy all of their budgets so the ECB will ensure rates stay constrained as long as possible) I think that
it is likely that we won't even see rates that high.

In the end this is a market and there is ample wealth in the world looking to buy bonds. So if Europe pays around 2% the US paying 2.6% is
likely sufficient. Even worse, as the US budget deficits remain constrained in terms of debt/GDP the demand for more funds by the treasury
is muted, thus likely causing a narrowing between US rates and the savehaven EU rates.
4 Mar, 01:27 PMReplyLike2
bale002
, contributor
Comments (65)

Analysts, MBAs, and other self-styled experts have been calling for the bond market to crater for several years now. This article looks like a
cut and paste from two years ago, three years ago, five years ago.

US Treasuries are one component of the overall bond market.

In any case, as mentioned above, deflationary risks still outweigh inflationary risks which, in turn, reflect budgetary restraints, which in turn
reflect the effects of globalization of industrialization on incomes of average workers: most likely, over the next 10-30 years, the incomes of
average workers (and retirees) in the countries of early industrialization and those of average workers in the newly industrialized countries
will continue their trend towards equalization. In that scenario, inflation caused by rising wages or a crisis of production is unlikely.

Most likely we already saw the extent of the effect of tapering on long-term interest rates in the May-December 2013 period.
Bond Market: Something Wicked Cometh This Way [iShares Trust, PIMCO ETF Trust] - Seeking... http://seekingalpha.com/article/2066533-bond-market-something-wicked-cometh-this-way?sour...
4 of 7 3/5/2014 8:59 PM

In the meantime, there are always shenanigans going on somewhere in the world which trigger a safe-haven flight into US Treasuries,
generating capital gains for those on the right side of them.

In short, long-term interest rates are more likely to remain subdued over the next 10-30 years, ask Japan, than they are to spike up by 100bps
per year which may prove to be a one-off event in the May-December 2013 period.

I would rather see articles that talk about how to navigate fluctuations within a certain range over 3-18 month periods rather than
oft-repeated, vague, generic gloom and doom like a stopped clock.

10Y Treasury 2.60%-3.25%
30Y Treasury 3.60%-4.25%
Fed Funds rate 0.25% sometime in 2015.

Anything more likely and more specific than that would be interesting and useful to read.
5 Mar, 09:30 AMReplyLike0
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