Get Ready for a “Credit Implosion”

by Justin Spittler, Casey Research:

The world’s biggest financial bubble just popped.

Regular readers know we’re talking about the bond market. This is where companies and the government borrow money. It’s about twice as big as the stock market.

In other words, it’s a key pillar of the global financial system. And it’s starting to give way…

Last summer, bond yields started skyrocketing.

The yield on U.S. 10-year Treasurys is now twice as high as it was last July.

This might sound like a good thing. After all, who doesn’t like earning more income?

But you have to realize something… Bond yields rise when bond prices fall.

• Investors aren’t used to seeing this…

After all, bonds have been rising since the 1980s. This historic bull market has survived three recessions, the dot-com crash, and the 2008–2009 financial crisis.

But Bill Gross thinks the good times are over.

Gross is one of the world’s most respected investors. He founded PIMCO, one of the world’s biggest bond fund managers. Today, he manages a giant bond fund at Janus Capital Group.

In short, he knows the bond market better than just about anyone on the planet.

In January, Gross wrote that the bond bull market would end when the yield on the 10-year Treasury topped a key level:

If 2.60% is broken on the upside—if yields move higher than 2.60%—a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that [sic] the Dollar/Euro parity at 1.00.

Since Gross issued this warning, I’ve been watching 10-year Treasurys like a hawk.

On Monday, it finally happened. The 10-year hit 2.62%.

According to Gross, the bond bull market is now officially over. A “secular” bear market has begun.

This means bond prices could fall for years, even decades.

• The world isn’t ready for this…

Remember, bonds have basically gone straight up for the last four decades.

When an asset does this, investors lose touch with reality. They buy more of that asset than they should. They assume nothing could go wrong.

But just about everything is going wrong in the bond market these days. I’ll explain why in a second. But first, we need to talk about yesterday’s Federal Open Market Committee (FOMC) meeting.

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