Get Out of the Bear Market in Bonds

We know it has to happen. And when it does, we’ll get out.

One of the speakers at a conference we attended in London last week, a professional money manager, talking about the most important bit of investment information you are likely to get in your lifetime.

He was probably speaking for thousands of his colleagues. All confident that they would be able to spot the turn in the bond market when it happens…and all leave the party in good order.

We’re still in the wee hours of a bear market in bonds that will probably last until the middle of the century. In fact, we’re so early that when the sun finally rises we may find we are not yet in a bear market after all. The action over the last two months — and especially the last two weeks — may be just another of Mr. Market’s famous fake-outs.

(We think Mr. Market is doing a great fake-out job in gold, by the way. More on that tomorrow…)

But in the bond market, it looks like the real thing. Treasury bonds continued their slide. And, since it has to happen sometime, we will suppose that the bond market has put in its top now. If we are too early…we’ll enjoy a leisurely cup of coffee while other investors are scrambling for the doorway.

Meanwhile, the New York Times reports that the exits are getting jammed:

Wall Street never thought it would be this bad. A bond sell-off has been anticipated for years, given the long run of popularity that corporate and government bonds have enjoyed. But most strategists expected that investors would slowly transfer out of bonds, allowing interest rates to slowly drift up.

Instead, since the Federal Reserve chairman, Ben S. Bernanke, recently suggested that the strength of the economic recovery might allow the Fed to slow down its bond-buying program, waves of selling have convulsed the markets.

The value of outstanding United States government 10-year notes has fallen 10% since a high in early May.

The selling has been most visible among retail investors, who have sold a record $48 billion worth of shares in bond mutual funds so far in June, according to the data company TrimTabs. But hedge funds and other big institutional investors have also been closing out positions or stepping back from the bond market.

‘The feeling you are getting out there is that people are selling first and asking questions later,’ said Hans Humes, chief executive of the hedge fund Greylock Capital Management.

That, by the way, is our advice. Get out now. You can ask all the questions you want later.
Everyone saw (or still sees) a turn in the bond market coming. Bonds have been going up for 33 years. They can’t go up forever. What can’t last forever has to stop sometime. This seems like as good a time as any.

But everyone cannot get out of their bond investments at the same time in a calm, orderly way. After three decades of bringing investors into the room, no trade is more crowded. When bond prices begin to go down…as they did the first week of May…the longer you wait to get out, the more you will lose.

So what do investors do? They head for the exits. All at once. And the bond market becomes an ‘owl market’. Everyone wants to sell. But ‘to who…to who?’

Owls are not trained in English grammar. They don’t know that the preposition ‘to’ is followed by ‘whom’, not ‘who’. But they are good investors. And they know a developing disaster when they see one. Clever bond investors chose to stay at the party — even when they saw a little smoke rising in the corner. Now they have to decide what to do.

Some will hesitate…wait too long…and then, every bounce will encourage them to wait longer, hoping to recover their losses. Others will stumble and be crushed underfoot, selling their bonds at panic prices.

Is the panic happening already?

No. We’ve only smelled the first faint whiffs of fear. The 10-year T-note still yields only 2.58%. The really nasty odour will come later…when smoke fills the room…someone hits the fire alarm…and those clever investors find the exits blocked.


Bill Bonner
for Markets and Money

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Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

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4 Comments on "Get Out of the Bear Market in Bonds"

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slewie the pi-rat
get out now and avoid the rush? i won’t argue with that. top vulture capitalist & Republican ‘band-leader’ Paul Singer [Elliot Management] gets my slewienomics ‘pi-rat award’ for calling the top, well before the election last year. and tight, timing-wise. he nailed it. the rate has increased rapidly, of late. when the 10-year rate goes from ~1.5% to ~2.5%, that is ~a 67% rate increase from the [v. small] base rate of 1.5%. hey! ole`! 67%! OMG! L0L!!! there is more to say, about the BOJ and the Yen [kamikaze] QE, which is supporting the dollar and [v. possibly] helping… Read more »
slewie the pi-rat

here is a cogent rebuttal:

the 10-year rate has NOT broken out of the downward channel.
therefore, any long-term reversal awaits confirmation.

the reversal which Singer called last June-July is [so far] not a long-term reversal.

i would concur and still give the ‘pi-rat award’ for his call.
just in case.

One reads dramatic forecasts of a bond market crash, but surely this is a very different animal to a share price crash. When the bottom drops out of a share you own, you can stick it in a bottom drawer and HOPE that one day you’ll get your money back. With a government bond, you can stick it in the drawer and KNOW that you’ll eventually get all your money back. Doesn’t this mean that the people who get mauled in a bond market crash are the ones who have to keep raising money with new bonds, rather than the… Read more »

Can’t see the woods approaching over the hood because your face is too close to the rear view mirror? That’s what cycle mania will do for you.

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