Get out of bond markets now - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 26 June 2013
Get out of bond markets now A  A  A

Paris, France

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

The speaker, in London last week, was 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 of them are 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 might find that we are not yet in a bear market after all. The action over the last two months - and especially the last 2 weeks - might be just another of Mr. Market's famous fake-outs.

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

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But in the bond market, it looks like the real thing. Stocks rose 100 points on the Dow yesterday. Gold lost a couple bucks. And 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 report that the exits are getting jammed ups:

    Exit From the Bond Market Is Turning Into a Stampede

    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 percent 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.
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 his bond investments in a calm, orderly way. After three decades of bringing investors into the room, no trade is more crowded. And when bond prices begin to go they did the first week of May...the longer you wait to get out the more you lose.

So what do investors do? They head for the exits. All at once. And the bond market becomes an "owl market"....where everyone wants to sell, but "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 real nasty odor will come later... when smoke fills the room....someone hits the fire alarm...and those clever investors find the exits blocked.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Get out of bond markets now"

Praveen Bhargava

Jun 27, 2013

Rates are falling in bond Market by 10% and the yields slowly stepped up to 2.58%in a short span of one and a half month time.The main reason for this steep fall is the statement coming out from FED Chairman Ben Bernanke that the Quantity Easing 3 Scheme which had started in September 2012 of purchasing of 85 Billion USD of Bonds each month will taper off and will close in June 2014.The scheme will close subject to improvement in US Economy by clear growth ,unemployment rate decrease and Manufacturing activity increase in the near future.
The advice from all corners are coming to sell bonds and stay with Cash for the time being in the present time.Presently all are falling may be Precious Metals,Stock Market,Other currencies except USD,10 year and 30 year Bonds.
Now if advice is followed and investments in Bonds is converted in Cash what will be next?See if the US Economy will not improve as anticipated by FED Chairman in the near future what will be done?In that circumstances the tapering of the scheme of Purchase of Bonds will not be stopped and will continue to operate even after June 2014.The chances of it is very much there.
One thing more.If the advice from all corners is to sell the bonds and kept cash is followed,there is a strong possibility that this advice will be proved wrong as per the present indications seen in the US Economy.
In my view it is better to follow the principle of "Wait and See" and don't take any quick/hasty decision to sell Bonds and kept Cash.In the next 6-12 months many new opportunities will come in the way and take investment decisions accordingly.

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