Major Disaster Developing For Bond Holders
Long-term U.S. Treasury bonds have fallen 7% in value since November 1 and municipal bonds have fallen 6%. “Safe” investments like Treasury’s and Munis are not supposed to crash they are the mainstay of widows and orphans. So What’s happening?
For most of the last century, the whole world has believed the obligations of the U.S. government – and the obligations of thousands of states, cities, towns, and other municipalities in the U.S. – were the safest investments in the world. These “safe” investments aren’t supposed to crash. The following article by Elliottwave Internations shows why Bonds are no longer safe. Tim McMahon~ editor
Why Bonds Do Not Provide Shelter From The Storm
December 23, 2010
By Elliott Wave International
TREASURIES — the very name conveys a thing that is secure, protected, and will appreciate over time. Otherwise, it’d be called something like “TRASHeries” or “Mattress Stuffers.” Then, there’s the official seal of the US Department of Treasury: its image of a scale and a key symbolize “balance” and “trust.”
And, finally, there’s the mainstream economic experts who have it on good authority that long-term bonds increase in value during financial instability and uncertainty.
On this, the following news items from November-December 2010 reflect the enduring faith in fixed-income assets as the ultimate safe-havens:
- “Bonds Tumble On Signs of Economic Recovery” (Reuters)
- “US Treasury Prices Rise as traders positioned for negative headlines….” (Associated Press)
- “Treasury’s rise as investors sought shelter in safe haven assets amid rising fears about sovereign debt woes in the eurozone. The slow motion train wreck is likely to play out over year end as each country plays musical chairs with solvency. The market’s concern here is ‘What is next?’ The 10-year Treasury yield will fall if the problems get worse from here.” (Wall Street Journal)
There’s just one problem with this notion: namely, bonds (of any denomination) do NOT have a built-in disaster premium. This is the myth-busting revelation of the latest, free report from Elliott Wave International. The resource titled “The Next Major Disaster Developing For Bond Holders” includes a thoughtful selection of various EWI publications that expose the very real vulnerability of bond markets to economic downturns.
The premier study on the subject comes from Chapter 15 of EWI President Robert Prechter’s book Conquer The Crash by way of this memorable excerpt:
“If there is one bit of conventional wisdom that we hear repeatedly with respect to investing, it is that long-term bonds are the best possible investment [in downturns]. This assertion is wrong. Any bond issued by a borrower who can’t pay goes to zero in a depression. Understand that in a [major contraction], no one knows its depth and almost everyone becomes afraid. That makes investors sell bonds of any issuers that they fear could default. Even when people trust the bonds they own, they are sometimes forced to sell them to raise cash to live on. For this reason, even the safest bonds can go down, at least temporarily, as AAA bonds did in 1931 and 1932.
The first chart (see below) shows what happened to bonds of various grades in the deflationary crash. And the second chart (see below) shows what happened to the Dow Jones 40-bond average, which lost 30% of its value in four years. Observe that the collapse of the early 1930s brought these bonds’ prices below — and their interest rates above — where they were in 1920 near the peak in the intense inflation of the ‘Teens.”
That’s just the tip of the iceberg in this myth-busting report.
“The Next Major Disaster” uncovers flaws in other widely-accepted bond lore as well.
Get your free Copy of the full 10-page report Here.
This article was syndicated by Elliott Wave International and was originally published under the headline Long-Term Bonds: The Best Possible Investment? Think Again. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
The Next Investment Disaster
By Susan C. Walker
When money market funds, mutual funds and CDs yield next to nothing, the old itch to find higher yields kicks in. That may be why Bloomberg has had a field day reporting on the latest attempts to find higher yields. For example, from an October 7 story: Private-equity firms are taking advantage of record demand for high-risk, high-yield debt to pay themselves dividends, saddling their companies with additional loans and bonds. … Shareholder payouts funded with bond and loan issuance climbed to $24.2 billion this year, more than triple the amount for all of 2009 and the most since the Standard & Poor’s 500 Index peaked in October 2007, according to S&P’s Leveraged Commentary and Data. (Bloomberg, 10/7/10) The yield may be high today, but Robert Prechter warns that it’s a dangerous game to play. He sees it as tomorrow’s next investment disaster. Read more
3 Reasons Now is Not the Time to Speculate in Stocks
After the investment winter of 2008, in 2009 as stocks began showing some “green shoots” and looked a bit like spring, 2010 has looked a bit like Summer or Autumn with prices flattening out and going nowhere. Does that mean that investment Winter is just around the corner again? Here is Robert Prechter’s take on the situation. ~editor
Sometimes the investment weather forces you to ‘buy a coat,’ says Robert Prechter
By Elliott Wave International
When it’s sunny, you head outside without a thought, but when it’s rainy, you look for your umbrella.
When the markets are trending up, you don’t worry about your investments much, but when the markets turn bearish … what do you do? Continue reading
Stocks and Commodities Stronger than Bonds
The Long-Term Case for Stocks and Commodities
By Chris Ciovacco
In their understandably concerned state of mind in the present day, investors may have lost sight of the longer-term drivers of asset prices. Bonds, especially U.S. Treasuries, have merit presently as high levels of debt have sparked concerns about deflation. However, in the long-run, the case for stocks, commodities, commodity-related currencies, and precious metals looks quite a bit stronger than the case for bonds.
In the current 24-hour news cycle, we have three separate stories that are significantly intertwined and related to this topic:
- According to the Washington Post, the Obama administration opened its conference on the future of housing policy yesterday with Treasury Secretary Tim Geithner promising both an overhaul of Fannie and Freddie and a continued federal role in backstopping mortgages
- James Bullard of the St Louis Fed told The Wall Street Journal the Federal Reserve might need to commence a program of moderate purchases of U.S. Treasury bonds if inflation continues to fall.
- In the Great American Bond Bubble (WSJ), Jeremy Siegel and Jeremy Schwartz, compare the current state of the U.S. Treasury market to the tech bubble of the late 1990s.
The long-term outlook for U.S. Treasury bonds is questionable at best, yet investors continue to Continue reading
Stocks Setting up for Big Slide
By Tim McMahon, editor
Historically whenever the 10-year Treasury yield drops 1.2% over a short period of time a bear market for stocks resulted within two months . This signal presaged steep market crashes in 1990, 2000, and 2007.
The Treasury yield signal is now flashing a major warning. On April 5th, 2010 the 10-year Treasury bond was yielding 4.01% and is currently yielding only 2.79%. So over four months the T-bond yield has fallen 1.22%. By this signal we can expect a 20% drop in the stock market over the next two months and it is possible that the beginning of that drop has begun today with a 2.5% drop. Continue reading
Why are my “I-Bonds” paying so little?
Recently I received this question about I-bonds. I-bonds are inflation adjusted Treasury bonds. The amount they pay is adjusted twice a year to compensate for the effects of inflation.
I am a holder of Treasury I bonds (adjusts to the CPI every May & Nov.) Last November the CPI that Treasury used was 2.8, which when adjusted to one year and added to the base rate of the bond resulted in a total return of 6.73%.
On May 1, 2006 Treasury used a CPI rate of .50, which when adjusted and added to the base rate of the bond results in a total return of 2.41%.
QUESTION: How is is possible in this inflationary period for such a dramatic reduction to occur? Continue reading
