When Bonds Go Kaboom!

Wolfstreet.com

By Bill Bonner, Chairman, Bonner & Partners:

We’re not the only ones giving Neanderthal advice about holding on to physical cash. British newspaper the Telegraph reports:

The manager of one of Britain’s biggest bond funds has urged investors to keep cash under the mattress. Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds for Fidelity, is concerned that a “systemic event” could rock markets, possibly similar in magnitude to the financial crisis of 2008…

The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some “physical cash,” an unusual suggestion from a mainstream fund manager.

The Fuse Is Lit

The markets seem to be in wait-and-see mode. Yesterday, we were waiting to see what happens in Greece. Today, we wait to see what happens in the bond markets. We watch them like we watch a stick of dynamite. For a long time, it might sit there… silent… still…

Then all of a sudden – kaboom!

At the end of January, it looked as though bond yields had finally found their bottom. With $5 trillion of sovereign debt trading at negative yields, bond prices began to fall. And yields, which move in the opposite direction to prices, started to rise.

Not for the first time did we think: The fuse is lit!

We were 33 years old when this bond market made its last turn. The yield on the 10-year Treasury bond hit a high of almost 15% in 1982. Yields have been trending downward ever since. If we had only imagined what would happen next!

“My partner knew someone who was managing money,” a friend recently told me, describing how he got rich. “So we decided to put our money with him. I had never heard of him. But his name was Warren Buffett.”

Either by genius, luck, or a little of both, Buffett was in the right place at the right time.

In retrospect, it seems so simple, so obvious. The feds had changed the money system 10 years earlier. Now, the payoff approached. Without the discipline of the link with gold, the financial industry could run wild. It could lend money no one ever made and no one ever saved.

It could lend trillions of dollars that it created out of thin air. And as long as yields were falling, it scarcely had to worry about credit quality. If a borrower got into trouble, it could lend him more… at a better rate.

From 1949 to 1982 bonds were in a bear market. Yields went up, as bond prices trended downward. Then the 10-year Treasury note bottomed. Since then – most of my adult life – there’s been a bull market in bonds.

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Reposted with permission