Bond Crash Ahead?

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 thoughts on “Bond Crash Ahead?”

  1. 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. 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$#;+
    Nobama

  3. 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.

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

Comments are closed.