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  • Bond Crash Ahead?

    Posted by Jonathan on April 2nd, 2009 (All posts by )

    One might think so, given the huge increase in federal spending, and the likelihood that the govt will sell bonds and/or print money to pay for it.

    Yet the govt bond market remains strong*. Why?

    I think there are several possibilities:

    -Our economy will recover quickly enough for the money-supply expansion to be absorbed by economic growth without a big increase in the price level; we will grow our way out of debt.

    -Today’s bond buyers and traders are too young to remember the 1970s; the bond market will crash eventually.

    -Even considering the risks, US govt bonds remain the best place to park money until investors have better alternatives.

    -Investors are playing a hot-potato game: holding govt bonds now is like keeping money in Mexican banks before a peso devaluation. Investors trade high returns (price appreciation for bonds, high interest rates on non-dollar bank deposits) against the risk of substantial capital loss in the event of a bond crash or currency devaluation.

    Only time will tell what the answer is. Perhaps it will be “all of the above.”


    *I started writing this post a few days ago. Govt bond markets, particularly the Japanese market, have weakened since then.


    6 Responses to “Bond Crash Ahead?”

    1. Mrs. Davis Says:

      I would not be surprised, and expect, to see things come unraveled when a Treasury auction fails. This nearly happened a few weeks ago. The reason for it may be political. The Chinese especially know their dollar holdings are going to fall in value sooner or later, whether through a revaluation of their currency versus the dollar or a devaluation of ours against all others. At least they can control the political gain by having the event occur at a time of their own choosing.

      I’ll not live long enough to learn the truth, but it is very interesting that the markets fell off a cliff on September 15, just as McCain was starting to climb in the polls. After his disastrous handling of the crisis, he was toast. Had the crisis not come along at that moment however…

    2. Robert Schwartz Says:

      I would be more unhappy, if I had any cash to invest.

    3. Robert Schwartz Says:

      I have amended my list of Noes for the era:

      No Bailouts
      No Stimulus
      No Subsidies
      No Earmarks
      No Pork
      No Deficits
      No Tax Hikes
      No Nationalizations
      No Socialism
      No Public Funding
      No Government Cheese
      No Bubbles
      No Bu11$#;+

    4. sol vason Says:

      There is a perfectly legal investment that was not affected by US inflation in 1970 snd will not be affected in 2010-2016. Further it can be easily converted into consumer goods without realizing a capital gain.

    5. Tatyana Says:

      Sol: a tease.
      unless you’re talking about investing in cemetery plots, I know of nothing that comply with your description

    6. John Says:

      At this point, I prefer a portfolio diversified among gold, ammunition, and canned goods. And a can opener. That’s important.