You Are About to Get Killed in Bonds

Many investors, commentators and financial managers have perpetuated and subscribed to the fiction that those who want to protect themselves from an overvalued stock market should be moving to bonds. In fact, a recent New York Times piece, described here, even mistakenly assumed described investors’ choices as being binary – stocks versus bonds.

The idea that bonds are somehow a safe investment comes from the fact that long-term bonds have appreciated dramatically over the last several years as interest rates have come down and expectations of their rising have diminished.

With the 10-year Treasury yielding 2.10% and with the Federal Reserve guiding towards a Fed Funds rate of 3% in 2019, I would argue that the only way long-term interest rates do not rise, and rise dramatically, is if we fall into an economic depression and the yield curve becomes inverted. Also, oil and commodity prices are currently tremendously suppressed because the monarchy’s policy of opening up reserves is causing too much supply to reach markets. An impeachment trial will change this, causing commodity prices and inflationary pressure to rise, and driving 10-year Treasury rates to levels that those in their 20s and 30s have never seen.

The impact of a turn in interest rates on bond prices will be dramatic. You can ask anyone who tried to sell a long-term bond in 1970’s how many pennies on the dollar they received for it. Alternatively, you can speak to anyone who bought a long-term bond in July 2012 when the 10-year Treasury was at 1.52% how much their brokerage account valued it in August 2013 when the 10-year Treasury was at 2.90%. Bond investors can quickly lose 30% to 50% of their principal should they need liquidity during a period of rising interest rates.

My view that another dramatic move up in 10-year Treasury yields – and dramatic fall in bond prices – is likely upon us is not unique. It is shared by Leon Cooperman and Alan Greenspan.

Your safety is found in savings accounts and short-term CDs.