This week I’d like to coddiwomple through central bankers, their flawed process for making pol...
Treasuries Are Toast
08/13/2009 10:34 am EST
Mary Anne and Pamela Aden, editors of The Aden Forecast, say the decades-long bull market in long-term Treasury bonds will come to an end soon.
Bond prices have dropped sharply this year, the most in 30 years. This alone tells us that bond investors are getting nervous; they’re concerned about future inflation and they’re cutting back on their bond purchases or selling them.
Foreigners own about half of all US government bonds, the highest level ever. And the bulk of those bond holders are foreign governments. Many of these governments are holding hundreds of billions of dollars in US bonds, [and] foreigners have been selling bonds since last year when the global financial crisis worsened.
What’s worrisome is that selling is intensifying as governments continue to voice their concerns about massive US spending, the likelihood of future inflation, the negative outlook for the US dollar, and the general direction the country is taking.
China is the US’s largest lender to the tune of around $1.5 trillion. It wants assurances that its loans are going to be OK, and top government officials, including Treasury Secretary Timothy Geithner, have promised to shrink the deficit by 2013. [But] the Chinese will want to see actions, not words.
Long-term interest rates [are] headed higher in the months and probably years ahead as inflation becomes more obvious, especially combined with the new low in the US dollar.
And considering the government’s going to need four or five times more money than it needed last year, this interest rate premium will likely shoot up much higher than most people realize.
Short-term interest rates are another story. The Federal Reserve is keeping them low and it probably will for as long as the economy remains on thin ice. But eventually, short-term rates will follow long-term interest rates up, and we’re now probably seeing the lows for interest rates for a long time to come.
It’s now important to watch the major up trend that’s been in force since the 1990s. If the bond price breaks clearly below that trend, bonds would be extremely bearish and they’d probably then be headed for a mega-drop similar to the one that happened in the 1970s. At that time, bond prices plunged about 70% as long-term interest soared, [with long-term rates] eventually peaking over 15% in 1981.
We don’t yet know if bonds will react as dramatically this time around, but we do know that all of the ingredients are in place, so they could. The first two solid signs would be a break below that long-term up trend and/or a sustained rise above the megatrend identifier at 4.67% on the 30-year yield. If that happens, you’d want to sell any bonds you may be holding. For now, it still looks like long-term interest rates are going to decline first before they head higher because they remain temporarily overbought. This will provide a good opportunity to sell some bonds, for those of you who have them.
It’ll also provide a great opportunity to buy into a rising rate fund, or to short bonds. That way, we’ll get in at a better price and be well positioned to take advantage of the big rise in rates, probably starting in the months ahead.
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