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Bond Buyers Beware

June 19, 2012

Economics, Economy, Finance, Markets, Wealth

Interest rates fell earlier this month to the lowest level in U.S. history.  The fall in the rate of the 30-year Treasury bond since 1990 alone is 65%.

This has happened despite record money printing by the Federal Reserve, which many predicted would lead to rising rates.  However, in an uncertain world, U.S. bonds have become the safe haven of choice.  Falling rates are deflationary and suggest a slowing economy and a continued demand for safety above all else.

At some point this mega trend of falling rates will stop and start to reverse.  What might be the catalyst?  Inflationists will argue that once banks start lending some of the money that the Fed has created, rates will start to rise in reaction to rising expectations of inflation.  However, deflationists will say that rising rates are not necessarily linked to inflation. Interest rates also fell during the Great Depression but then they suddenly reversed course as the risk of default rose.  This, they will argue, is exactly why rates are increasing on European sovereign debt, not because of inflation expectations, but because of rising fears of default.

But if U.S. bonds have become the safe haven of choice shouldn’t interest rates on Treasury bonds be the last to rise?  Not necessarily, as the U.S. government is not the strongest sovereign debtor by far.  Rates on German, Swedish, Danish, Swiss and Japanese government bonds are currently lower than comparable bonds in the United States and one credible advisor has already warned  that Japan could default within five years.

Whether inflation or deflation is the greatest threat, for thirty years bonds have enjoyed the longest bull market on record.   Bond buyers have become complacent.  It’s time to say again, caveat emptor.

Please note that these articles are not intended as legal or financial advice.

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About Malcolm Greenhill

Malcolm Greenhill is President of Sterling Futures, a fee-based financial advisory firm, based in San Francisco. I write about wealth related issues in the broadest sense of the word. When I am not writing, reading, working and spending time with family, I try to spend as much time as possible backpacking in the wilderness.

View all posts by Malcolm Greenhill

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2 Comments on “Bond Buyers Beware”

  1. Raunak Says:

    Japan defaulting would be a major catastrophe!

    Reply

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