If there’s any doubt that the generation-long bond-market rally has come to a close, Federal Reserve Bank of Dallas President Richard Fisher just ended the discussion.
After a speech in Toronto on June 4, Fisher, a critic of Chairman Ben Bernanke’s unprecedented printing of $3 trillion to prop up the economy, told reporters: “This is the end of a 30-year rally” in bonds. He said investors are “being compensated for risk at such a low rate in nominal terms, forget about spreads” and that “at some point, secular markets change.”
|This week Richard Fisher, President of the Federal Reserve Bank of Dallas, dropped a bombshell on the bond market.|
And Fisher is far from alone …
Pimco’s Bill Gross, who manages the world’s biggest bond fund with $293 billion in assets, recently tweeted bluntly that “the secular 30-year market likely ended 4/29/2013”.
And billionaire investor Warren Buffett said a month ago that bonds are a “terrible” investment these days. He says the average investor ought to own stocks and keep some money in cash.
These assessments are spot on in my view. Most bonds simply don’t offer enough yield to justify the risk of loss involved in owning them. Case in point: Ten-year Treasury notes yield less than one percent after accounting for inflation, and the real yield was negative three months ago.
Despite professional investors’ warnings, Fisher’s appraisal of the bond market unfortunately came too late to protect some people from May’s rout. The 10-year Treasury yield jumped 50 basis points to 2.16 percent last month, with most of the increase coming after Fed Chairman Ben Bernanke said May 22 in front of Congress that the central bank could taper its bond-buying program within several months.
I’ve been watching developments in the interest-rate markets for more than 15 years, and I’ve seen plenty of shocking moments. Alan Greenspan’s “irrational exuberance” remark about the stock market in 1996 was one. And Bernanke’s claim that subprime-mortgage problems were “contained” a few years ago is another.
But I have yet to hear a Fed official effectively tell investors to dump an asset class. It’s simply not in the central bank’s DNA. What’s worse is that the advice is coming after a few years in which the Fed itself turbocharged bonds by dropping official rates to zero and buying bonds by the truckload.
I myself have been warning for several months that the bond market was a disaster in the making, and that major losses were looming in everything from junk bonds to emerging-market debt to long-dated Treasuries.
Now, that pain is plain for all to see!
- The iShares JPMorgan USD Emerging Markets Bond Fund (EMB) recently wiped out an entire year’s worth of gains in just a couple of weeks.
- The iShares Barclays MBS Bond Fund (MBB) plunged to its lowest level in 23 months as you can see in the chart below.
- Even so-called “safe” municipal bonds, as represented by the SPDR Nuveen Barclays Municipal Bond ETF (TFI), are tanking. This ETF sank to a 14-month low.
It should be noted that Fisher is considered a “hawk,” or a central banker who’s tougher on inflation. And I haven’t seen any evidence that Bernanke, Vice Chair Janet Yellen or other Fed “doves” — those who favor easy money to spur the economy — are ready to reverse course on their reckless policies on quantitative easing, or QE.
But the seed has been planted by Fisher and other Fed members. So investors are dumping bonds before the Fed is forced to change tack.
And what if the Fed doesn’t change its approach? Personally, I think bond investors will increasingly sell anyway. That’s because QE is starting to backfire, most notably in Japan, with rates rising instead of falling.
To put it plainly, I agree with Fisher. The great bond bull market is dead no matter what central bankers say or do. Invest accordingly.
Until next time,
P.S. I’ve been doing my dead level best to prepare you for this rising rate environment. I’ve shared advice on how to dodge a bond market disaster here in Money and Markets, and recently, I went a step further. I published a special report entirely dedicated to strategies and steps that can help you protect yourself – and profit – when interest rates surge. You can get your copy here.