Bonds: The “Trade of the Decade”

04/10/2012 4:35 pm EST

Focus: TRADING

John Carter

Author, Mastering the Trade

The euro debt crisis has forced assets to pour into safe havens like bonds, says John Carter, but it’s the unwinding of the bond bubble that could create the trade of a lifetime.

The wild and wacky world of the euro! I’m with John Carter, and we’re going to talk about what’s happening with the euro and what we can do about it as traders.


Yeah, the thing with the euro is that it’s going to be news driven almost every day.

There’s been a lot of talk about Greece for the last year, and there’s going to be talk about Greece for the next year. We know it’s always going to be there, and the big question is going to be whether Greece is going to get kicked out of the European Union; will it default?

The thing about it is that the market is extremely efficient about pricing this stuff in. The euro got slammed, but it has been on the rebound a little bit. The question is, over the course of, say, the rest of 2012 and in 2013, how much of an issue is this going to be?

Obviously, Europe has a lot of problems, but the US has a lot of problems, too. The big battle is which currency is going to run out: the dollar or the euro?

I’m looking for the euro and the dollar to continue to get a little bit closer together during this crisis, and that means through 2012 and into 2013.

Also, there’s a lot of uncertainty out there, and money is going to flow into US bonds. Now, if it flows into US bonds, that’s going to support the US dollar. So we have a liquidity crisis, meaning that there is too much liquidity out there.

When there’s a sea of liquidity out there, believe it or not, that is a crisis, because it has to find a home into assets.

So even though we’ve got deflation in some parts of the economy, there’s asset inflation in terms of what’s going on in oil—and even gold and silver, which is justified, in that case—but bonds especially.

Bonds right now is the biggest bubble that’s out there, and the net result of this European crisis is that at some point, as it starts to actually get resolved, the bull market is going to crater in the US, and that’s going to start driving up long-term interest rates.

As long as there is a crisis here; as long as people are wondering what’s going to happen next; as long as there’s uncertainty, then there’s going to be liquidity out there.

The banks are going to create liquidity, and that’s going to create money that flows into bonds. That’s going to keep pushing bonds higher, and it’s going to keep interest rates low. It’s going to support the US dollar, and at some point, this is all going to come tumbling down. That’s going to be the trade of the decade right there.

And you also have Japan and you have government intervention everywhere, which seems to be skewing most of what’s going on, right?

Yeah, and that’s not going away. That’s the thing to remember: government intervention is not going away. People a lot of times will say that this wouldn’t be going on if it wasn’t for the governments. The government is not going away, so don’t fight it at this point. You just can’t fight it.

We’d have a whole different problem if the government wasn’t involved.

Yes, that would be a whole different set of issues.

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