Calling a Bond Bubble

We are even more alarmed at the outlook for bonds than we have been, and we have been very worried for a long while now. Not to put too fine a point on it, we remain very bearish on bonds of nearly every stripe, and believe that the inevitability of interest rate hikes will mean big losses—either in bond value losses or reductions in purchasing power—for most bondholders. This is a drum worth beating, since too many investors and pundits seem to be taken in by the siren song of a relenting Fed and a very slow glide path to higher U.S. interest rates, a situation too similar to the proverbial frog in the pot of slowly heating water.

I think a huge bubble is forming in U.S. government bonds, which will likely result in devastating investor losses and a significant economic shock around the world. No less than Goldman Sachs recently said that even a 1% “upward shock to interest rates would translate into over $1 trillion in capital losses” to those invested in Treasury and similar bonds. “Bond King” Bill Gross recently tweeted “global yields lowest in 500 years of recorded history…this is a supernova that will explode one day.” Barron’s notes that a 1% increase in 30-year Treasury yields would equate to a 20% drop in bond value, with worse outcomes for government bonds from Japan and Europe. Similar risks apply to tax-free muni bonds. Camarda agrees with Barron’s that “stocks still look like the best game around”, with the caveat that smart stock investors need to be very picky—stocks may not be as inflated as bonds, but most are no bargains.

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