Bond Forecasts Coming True — in Aces and Spades! Are You Protected?

I’ve made no secret of my view on the bond market for the past several months … not here in Money and Markets, not in my flagship Safe Money Report newsletter, not in private conversations and public presentations, or anyplace else!

Take my November 2012 issue of Safe Money. I headlined it “Yield Insanity!!” and warned how investors were “Chasing yield — buying anything and everything that isn’t nailed down simply because those assets pay out higher interest rates” as a consequence of the “free-money policies of Federal Reserve Chairman Ben Bernanke and his cohorts overseas.” I said this was yet another bubble, and that its days were numbered.

Yield-chasing investors have been pouring money into junk bonds, creating a bubble much more dangerous than what we saw in real estate a few years ago.

Here in Money and Markets, I specifically singled out the junk bond market in early December. I said the “out of control activity I’m seeing in the market for high-risk, junk bonds is so bad — and by some measures, WORSE” than the bubble behavior we saw in real estate several years back.

And in multiple venues and presentations, I noted the performance of emerging market bonds and ETFs like the iShares JPMorgan USD Emerging Market Bond Fund (EMB). Take this Money and Markets column from mid-October. I noted in the piece that they were heading toward “bubble-icious territory” and that “now is a good time to start bagging gains.”

So how are those forecasts panning out? Like clockwork!

EMB to JNK to MBB to TLT to EDV —

the Bond Market Carnage is Everywhere!

Treasury bonds. Mortgage bonds. Emerging market bonds. They’ve all been heading south. After trying their darndest to hold up in the face of overwhelming selling pressure, now even JUNK bonds are dropping like a rock …

==> The EMB just plunged almost $5 in a virtual straight line, a big move for a bond ETF. In fact, it just fell to its lowest level since late August. A similar ETF, the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY), has lost every penny of gains it spent the past five months racking up …

==> The SPDR Barclays High Yield Bond ETF (JNK) just fell the most in a single day since June …

==> The iShares Barclays MBS Bond Fund (MBB), a benchmark mortgage bond ETF, just fell to levels it first breached on the upside back in August 2011 …

==> The iShares Barclays 20+ Year Treasury Bond Fund (TLT)? It has given up every penny of gains going all the way back to last May …

==> And investors unfortunate enough to own one of the longest-term bond ETFs on the market — the Vanguard Extended Duration Treasury ETF (EDV) — have really been hammered! They’ve lost almost 21 percent of their money in only six months — on a U.S. Treasury fund!!

Interest rates, which move in the opposite direction of prices, are naturally on the rise. The yield on the 5-year Treasury Note just tagged 0.92 percent, while the 10-year Treasury Note yield shot through 2 percent like a hot knife through butter!

What to Look for NEXT in Bonds!

Why do I harp on interest rates and bonds so much? Because the bond market is huge — MUCH bigger than the stock market — and because the bubble we’ve had in bonds is orders of magnitude GREATER than the previous bubbles that preceded it, in housing and tech stocks. That means both the dangers to your wealth … and the profit opportunities … are much greater!

So what’s coming next? And what should you do?

Well, hopefully you already dramatically reduced your bond market exposure. I recommended that step months ago when bonds were still at or near all-time highs. If you have not, I urge you to act now before rates rise any further … and bond prices fall even harder!

We’re flirting with some key levels here in the Treasury market — roughly 2 percent on the 10-year note and about 3.2 percent on the 30-year bond. If we break out to the upside here, as I expect, it could unleash another selling wave throughout the bond market.

Ultimately, I would not be surprised to see 10-year yields shoot up by another 100 basis points to 3 percent. And we could see 30-year yields head up to the 4 percent to 4.5 percent range. Beyond that? Who knows! The only thing certain is that a move like that would hand bond investors even more painful losses.

What about those folks who are counting on the Fed to save their bacon? Who bought bonds on Ben Bernanke’s pledge of QE-Infinity?

Just look at the charts!

Anyone who listened to Bernanke and bought Treasuries and mortgage bonds when he promised to buy an unlimited amount of bonds, for as long as it takes, has done nothing but lose money!

That proves that the bond market is BIGGER than the Fed, and that the Fed is clearly starting to lose control of rates despite its promises of QE-Infinity!

So please take steps to protect yourself now. Or if you’d like more on my latest bond market strategies, including a recommendation designed to RISE in value as bonds FALL, check out
Safe Money. It’ll get you pointed in the right direction!

Until next time,

Mike