A Bubble Bigger than Housing Is About to Pop

The most devastating market events are those that no one sees coming.

Take what happened to the Lehman Brothers in 2008, for example. Up until the last minute, virtually no one could have imagined one of the country's leading investment banks would file for bankruptcy. The housing market crash was the same way. The Street believed housing prices would never go down.

With the market totally blind to the growing risk in each investment, anyone who had investments in housing or with Lehman Brothers suffered huge losses.

Despite these tough lessons, there is now another epic bubble developing and the market is ignoring this one too.

In fact, this bubble is so big, the 2006 housing bubble and the 2000 bubble pale in comparison. And when it pops, it will hit the most conservative portfolios the hardest.

While investors were burned by big losses in 2008, risk-averse investors have been flocking into the safety of Treasury bonds. In just the past four years, investments into bond mutual funds have doubled to $4 trillion. But this perceived bastion of safety is more like a ticking time bomb waiting to explode. And when it does, it will devastate any portfolio with a heavy allocation to Treasury bonds.

Here are four reasons why it's time to sell treasuries.

1. Risk and reward
The best reason to abandon the bond market is a simple matter of risk and reward.

With the U.S. Federal Reserve beating yields into the ground in the past four years, the risk-reward ratio in the Treasury market is terrible. If the yield on the 10-year Treasury note fell to zero from its current 1.9%, then bond prices would rise about 17%, according to Timely Portfolios. On the other hand, if the yield grew 2-3%, bond prices would fall about 20%.

In 1994, at the beginning of the epic stock market rally, bond yields jumped 240 basis points in nine months. If that were to happen again, bond prices would plunge 50% and anyone holding Treasury notes would sustain huge losses.

2. Yields have never been lower
According to O'Shaughnessy Asset Management, 2013 could be the most difficult environment in 140 years to generate income. That's because it's the most affordable time in 223 years for the U.S. government to borrow on a 30-year term. In relation to the risk/reward proposition, yields on Treasuries really have only one way to go, and that is up. And when they do, it will have dire consequences for bond investors who think they are making "conservative" investments.

3. Too much debt
Adding fuel to the debate about Treasury yields is the fact that the United States has rarely, if ever, been in a worse financial condition.

On a consumer level, a weak financial profile means higher borrowing costs. But with the Fed working its magic over the market and artificially pounding yields into the ground, the bond market no longer reflects the financial condition of the United States. For the time being, the country continues to get a free pass from the world and the bond vigilantes for its wild spending and unsustainable fiscal deficits, but a correction is sure to happen. And when the United States is forced to pay higher borrowing costs due to its unsustainable deficits and ballooning debt, the bond market and its investors will suffer huge losses.

4. The private sector
Although the economy is plagued by high levels of unemployment and slow gross domestic product growth, the private sector has rarely been stronger. Earnings, margins and cash balances are at an all-time high, which makes equities and corporate bonds attractive alternatives to Treasuries carrying huge credit and interest-rate risk.

Risks to Consider: There is a classic saying on the Street: "Don't fight the Fed." The Fed is the single most powerful financial institution in the world and remains fully committed to keeping rates down. Although the United States is in horrible financial condition, the market still views Treasury bonds as a safe haven, which could send prices higher if another financial crisis hits the Street.

Action to Take --
Despite the country's battered financial condition, Treasury bonds are still viewed as one of the safest securities in the world. But with a terrible risk-reward ratio, growing fiscal deficits, record-low yields and attractive alternatives, the Treasury market is ripe for a long overdue correction. That's why it is time for forward-thinking investors to sell their Treasury bonds and protect their portfolios from huge losses.

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15 thoughts on “A Bubble Bigger than Housing Is About to Pop

  1. One of the Ten Commandments is "Do not steal". Another definition of stealing is to borrow without the intension of paying it back. Our legislatures and President are so corrupt that they no longer can even blush at their sin, But this is the Post Modern area where truth is despised - and the guideline is "if you think it is alright, then it must be so". We get the government we deserve. In Pennsylvania in the last election, we had the opportunity to elect a Republician Senator who would have changed the balance in the Senate - but we refused. So we can carry that blame.

  2. It will not POP for a long time because everyone knows the debt will never be paid back! Keep Buying Stocks and Bonds because, "It truely Is Different This time!"


      1. Different than what? That's the problem. There are so many people out there determined not to make the mistakes of the past that don't really understand the mistakes of the past in the first place.

        For example, in the 1921-1932 period that less than ten percent growth over 12 years, Republicans owned both houses plus the presidency for the entire time (there was a virtual tie in 1931 and 1932). If you look at the Republican policies and positions at the time, they sound like what you would find in a speech by Ronald Reagan's crowd today.

        Meanwhile, the economy grew by over 180%-190% over the next twelve years (1933-1945) and Democrats controlled both branches of congress plus the white house for 12 years, and Clinton and Obama sound like right-wingers compared to their policies then. (It is also worth noting that that is the only 10% growth period in American history).

        Result? You can hear FOX News tell 50 million people a day that Democrat policies are the problem.

        It is not just the winners that write the history books, but the Businessmen among the winners.

  3. Take an any government on the earth, you will find it shrink in debt....bonds are nothing more then a paper, a system which is giving arrangement to pass-on present problems to future.

    Entire financial system world wide, simply based on debt, debt and debt only without any basic or fundamental strength or structure, entire collapse is the only probable end result, and we must prepared to face it in all the means.

  4. Soaring interest rates very well could sink gold and other hard assets, as what happened after the 1980 gold bubble was popped and by 1982 interest rates were 15%.

  5. I couldnt agree more with this article.
    However, Timing is everything to profitability.
    Here in the UK we face the same problem. Only a New Economic Paradigm can keep the chickens from their roost.
    They will surely return if China has to sell large amounts of Treasuries.

  6. Does this warning apply to holdings in Vanguard funds such as VWINX ? It holds some federal bonds, I think.

  7. The government can't afford higher yields otherwise it goes the way of Greece. QE4ever will keep yields low 4ever, just like in Japan for more than 20 years.

    1. Look at basic supply and demand. We have been steering more and more of the nation's wealth into the hands of the rich for 30 years and we have been increasing the money supply enough to keep that process from shrinking the economy. At this point, the government couldn't create high interest rates if it wanted to. The dollars providing return on investment have been going down while the dollars seeking investment have gone up. The math is really simple!

      1. Save Haven like the U.S.D. ? lmfao
        Haven is a dutch word,we are OWNed by the Bilderbergers and the Vatican mobsters

        1. I wasn't addressing the causes of wealth inequality, only the effects, and if you look at supply and demand, a lot of people find even just the effects surprising.

          For example, how many people out there believe that US trade deficits are caused by greedy consumers?

          There is a simple test to let you know what is going on here. If consumer greed changed and our financial system stayed the same, then you would see the price of imports driven up and the price of exports driven down by supply and demand, which in turn causes a weak dollar. If the original change is in our financial system, then you would expect a strong dollar to drive export prices up and import prices down, which will in turn increase the US import consumption/export ratio.

          Since we see a strong dollar in association with the increased consumer greed, we know the money flowing into our borders is the cause and the price of import and export goods is the effect.

          This math should not be surprising to anyone who understands reagent concentrations in basic chemistry.

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