The Coming Collapse & Bonds

Bond markets are where the next collapse will begin.

A good article and the impetus for this writing about bonds:

https://www.zerohedge.com/news/2018-07-16/icecap-asset-management-eruption

Bond Basics

Yield vs. price value is inverse for bonds so as yield goes higher (more valuable bonds) the price of the previous bonds drops. New bonds are released monthly into market, so investors will always want the higher yield NEW bonds (longer time of payout) than an older/low yield bond. For example: a holders of a 1% bond, and new bonds are released that are 2%, then investors want the 2% not the 1% bonds. This means that the old bonds price is dropped by the difference in rate of return (yield) from the old to new bonds because the buyer can get a new/better bond for that same price.

This price difference is over the time frame is based on that bond return. The futures price of bonds is based on a delivery of vague timeframes with average values of rate for those bonds. In some markets a bond with 10 to 7 years left on yield counts as a 10 year bond.

A bonds SHOULD eventually return investors` money when the bond expires. That is NOT the case when the government or business defaults. Greece cut their bonds in half, yet investors are still buying them. Argentina has defaulted 2 times in recent history, yet there is still buy side action.

Opinion and Perspective

As a trader, I don`t like bonds. I will scalp them (over a few hours at most) in slow markets for small profits. I have never understood why an investor would want to lock away their money with a government for 10 years or 30 years. This is especially true with bonds at a rate that pays LESS than inflation. I do not believe anyone is stupid enough to invest in a bond that pays a NEGATIVE rate of return (but they do!). I do not think investors are dumb enough to lock away money with governments for long periods when those governments have been shown to default (Argentina 100 year bonds - What idiot is buying that rubbish?!). I can`t believe any investor would enter a perpetuity bond (forever bonds - WTF!?) especially at low interest rates (But that is where pension funds are invested!). But, if you are dumb enough to want that, you can get it here:


The Addlepated 1% Negative Rate Perpetual Bond - you give me your us and then pay me to keep it. WE have never defaulted on our debt obligation (again - Argentina).

http://addlepated.com.au/addlepated-bonds/

The Collapse of Bonds

Pension funds and long term `stable` funds invest in bonds. They do this because bonds are meant to generate a long term stable rate of return. However, if those stable investments are dropping in price (lower underlying value), then these funds will be losing money. This is the case when they are invested heavily in low rate bonds. Many funds have been investing in the bonds released during this period of 0% and 1% rates. When rates move higher (over 3%) their bonds will drop in value.

When buyers are avoiding the bond market, it sends bond yields higher. This is the case when interest rates move higher because it is more profitable to invest in lower risk interest rate dependent areas (real estate, car loans, mortgages, etc) than to lock money away in bonds.

Interest rates have been kept at obscenely low levels by Central Banks. These rates MUST move higher. Historically after periods of low rates, interest rates soar. In the 1980s, the rate pushed as high as 15%. That means that people were paying up to 18% on home loans. Rates SHOULD be around 7% for a stable economy, but they have been so low for so long that they MUST rebound.

(Interest Rate Chart here: http://www.ritholtz.com/blog/wp-content/uploads/2012/01/Long-Term.png)

WHEN these rates rebound, holders of bonds at low rates are going to get crushed. Any junk bonds (high yield / high risk) will be destroyed. Funds that are supposed to be stable and long term will be hemorrhaging money.

Pension funds are the main investors in bonds, usually at 40% or more. So, check your retirement fund because when it collapses, you will not be able to hedge your funds.

Hedges against bond collapse are: Stocks, gold, cryptos.

Gold is the best long term stable place to lock up money, but only if YOU have access to it when you need it. Holding physical gold is the safest play because ETFs and paper gold plays will evaporate when the market collapses.

Stocks are the counter trade to bonds. If the bond market collapses, stock will also fail. So not a good hedge, but a decent counter trade.

Cryptos are just currency that is not controlled by governments. When bonds fail, the government that printed those bonds will need to print more cash to cover the losses of funds, banks and pensions. That will devalue their currencies, making everything NOT currency more valuable. Cryptos are liquid and outside of the banking system, so a good hedge against a collapsing banking system and failing governments.

DISCLAIMER:

YOU ARE AN ADULT and must make your own decisions. ONLY YOU know what level of experience you possess. ONLY YOU know what level of risk you are willing to take. ONLY YOU know what your financial goals are, and to what lengths you are prepared to go to meet those goals. You will be the one to wear your losses, so trade with caution and do your own research.

Henry Ledyard is an independent trader. He has NO affiliations with banks, brokerages, funds, trading houses or markets. He trades for himself and posts trading ideas merely to share information. He does NOT want your money, advice or opinions. He does NOT want your unsolicited emails. If you require further financial advice, seek it elsewhere. Henry`s opinions should be considered as addled as his blog site:

www.addlepated.com.au