Bubble bigger than housing about to pop

The market is ignoring a huge looming bust in Treasurys, but there's still plenty of time to get out.

By StreetAuthority Mar 28, 2013 4:53PM
By Michael Vodicka                                         

The most devastating market events are those that no one sees coming.

Take what happened to Lehman Brothers in 2008, for example. Up until the last minute, virtually no one could have imagined one of the country's leading investment banks would file for bankruptcy. The housing market crash was the same way. The Street believed housing prices would never go down.

With the market totally blind to the growing risk in each investment, anyone who had investments in housing or with Lehman Brothers suffered huge losses.

Despite these tough lessons, there is now another epic bubble developing and the market is ignoring this one too.

In fact, this bubble is so big, the 2006 housing bubble and the 2000 bubble pale in comparison. And when it pops, it will hit the most conservative portfolios the hardest.

While investors were burned by big losses in 2008, risk-averse investors have been flocking into the safety of Treasury bonds. In just the past four years, investments into bond mutual funds have doubled to $4 trillion. But this perceived bastion of safety is more like a ticking time bomb waiting to explode. And when it does, it will devastate any portfolio with a heavy allocation to Treasury bonds.

Here are four reasons it's time to sell Treasurys.

1. Risk and reward
The best reason to abandon the bond market is a simple matter of risk and reward.

With the U.S. Federal Reserve beating yields into the ground in the past four years, the risk-reward ratio in the Treasury market is terrible. If the yield on the 10-year Treasury note fell to zero from its current 1.9%, then bond prices would rise about 17%, according to Timely Portfolio. On the other hand, if the yield grew 2-3%, bond prices would fall about 20%.

In 1994, at the beginning of the epic stock market rally, bond yields jumped 240 basis points in nine months. If that were to happen again, bond prices would plunge 50% and anyone holding Treasury notes would sustain huge losses.

2. Yields have never been lower
According to O'Shaughnessy Asset Management, 2013 could be the most difficult environment in 140 years to generate income. That's because it's the most affordable time in 223 years for the U.S. government to borrow on a 30-year term. In relation to the risk/reward proposition, yields on Treasurys really have only one way to go, and that is up. And when they do, it will have dire consequences for bond investors who think they are making "conservative" investments.

3. Too much debt
Adding fuel to the debate about Treasury yields is the fact that the United States has rarely, if ever, been in a worse financial condition.

On a consumer level, a weak financial profile means higher borrowing costs. But with the Fed working its magic over the market and artificially pounding yields into the ground, the bond market no longer reflects the financial condition of the United States. For the time being, the country continues to get a free pass from the world and the bond vigilantes for its wild spending and unsustainable fiscal deficits, but a correction is sure to happen. And when the United States is forced to pay higher borrowing costs due to its unsustainable deficits and ballooning debt, the bond market and its investors will suffer huge losses.

4. The private sector
Although the economy is plagued by high levels of unemployment and slow gross domestic product growth, the private sector has rarely been stronger. Earnings, margins and cash balances are at an all-time high, which makes equities and corporate bonds attractive alternatives to Treasurys carrying huge credit and interest-rate risk.

Risks to Consider: There is a classic saying on the Street: "Don't fight the Fed." The Fed is the single most powerful financial institution in the world and remains fully committed to keeping rates down. Although the United States is in horrible financial condition, the market still views Treasury bonds as a safe haven, which could send prices higher if another financial crisis hits the Street.

Action to Take:  Despite the country's battered financial condition, Treasury bonds are still viewed as one of the safest securities in the world. But with a terrible risk-reward ratio, growing fiscal deficits, record-low yields and attractive alternatives, the Treasury market is ripe for a long overdue correction. That's why it is time for forward-thinking investors to sell their Treasury bonds and protect their portfolios from huge losses.

More from StreetAuthority
187Comments
Mar 29, 2013 9:33AM
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No one here knows their history. What everyone here fails to realize is that it's all being done on purpose. The housing bubble, the tech bubble, currency wars, debased currencies, QE, massive debt, huge deficits, artificially low interest rates, deposit confiscation, high inflation, higher taxes. All being propped on purpose. A global contagion. The 12 banks of death that are the hydra of the Federal Reserve & The bank of England. The goal is to wipe out the middle class, rape and pillage the land like in Europe and steal as much private wealth for the banks and the elitist for pennies on the dollar. Andrew Jackson knew  Nicolas Biddle's second Bank of the United States agenda. So did Thomas Jefferson on the Bank of England. Here is a bit of history for you folks. During the Napoleonic wars, especially the Battle of Waterloo when the Rothschild bankers knew the outcome of the battle before most of Europe and England did. They cornered the market by falsely claiming the battle was lost hedging themselves against the purported  lie. When the markets collapsed around Europe seeing despotic tyrannic rule by Napoleon all over Europe, the Rothschild swept in to buy every share, asset and stock they could get their hands on for pennies on the dollar. When the news reached the markets that Napoleon was defeated, the markets rebounded vigorously and the Rothschild were that much more powerful and wealthy. Same game here folks. The banks and the elitist are after your money and property for greed, power and control!!!
Mar 28, 2013 7:01PM
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Just about everyone but Uncle Ben knows this. You can't just continue to print money out of thin air Forever.
Mar 28, 2013 8:33PM
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Interest rates are lowest they have ever been, and have nowhere to go but up.

That means bond prices have nowhere to go but down. And down big.

Mar 29, 2013 7:34AM
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i wish the fed and gov would get out of the bubble blowing business and let the market truly work like it is supposed to .you know supply and demand .green energy,college tuition,ethanol,ge, almost everything else you can think of.
Mar 29, 2013 9:52AM
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"The Street believed housing prices would never go down."

Really? Everybody I know, knew it was insane, couldn't last, and would end bad. However, we didn't know exactly when, the same goes for the bond market bubble.

 

 

Mar 29, 2013 11:00AM
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It all starts with out of control Federal spending. 

Mar 28, 2013 11:56PM
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I don't sabe much of this, but I do recognize a few very dangerous facts such as gross indebtedness.  It reminds me of what my

father use to say, " New Presidents soon find out that it is the bond market that is the boss and not themselves."  So when

the bond market says were screwed that means we probably are.

Mar 29, 2013 11:25AM
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Buy bullets and Booze your going to need em.
Mar 28, 2013 8:14PM
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The "market" is full of socio-psychopaths who think they know better than natural inevitability. They don't. This doesn't end well.
Mar 28, 2013 9:29PM
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And one more point ---just what do these comments do to our economy or our wonderfull politicians?

Absolutely nothing ---all these comments do, is allow us to vent.

Mar 28, 2013 8:50PM
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It's just like the housing bubble and once the selling starts it's going to accelerate and rates will have to go up and it's going to accelerate faster and faster. As everyone knows once gravity takes over it doesn't take long to get out of control. I wonder if anyone has stress tested the Federal Reserve to see  what rate bond selling and resulting interest rate increases the Fed would have to yell uncle,
Mar 29, 2013 9:03AM
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This whole economy is propped up by government scams with manipulation of interest rates and monetary poicy. There is considerable evidence tat people are back to borrowong at a level they cant pay back and fed policy is enabling this. The bill will come soon enough.
Mar 28, 2013 9:37PM
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Now here is an author with a firm grasp of the obvious....
Mar 29, 2013 11:58AM
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To paraphrase the words of the Pete Seeger Vietnam era protest song thanks to Ben and his bunch of merry men we are "Waist deep in the Big Muddy River" and the big fool says to push on.  And the bigger fool in the White House continues to urge him on. 
Mar 29, 2013 11:26AM
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Just makin' way for the one world government with a one world currency!  Read the Book of Revelations if you dare!  His return is imminent!
Mar 29, 2013 12:09PM
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No doubt that the stock market is filled with a lot of hot air waiting to escape.  The Fed is doing no one a favor by allowing this bubble to continue to grow unabated.

 

Love to see my investments go up because I know they will be going down a lot and only hope that my losses are not too great.  We need real economy growth rather than cheap money that allows speculation.

Mar 29, 2013 12:22PM
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For Airplane Al

Buy bullets? Where? I went into WalMart yesterday & asked for a box of 9mm shells. The clerk said he had just gotten in 30 boxes & were gone within an hour. The store literally did not have any kind of bullets to sell. Nothing. But booze on the other hand seems to be in plenty supply. For now?

Mar 29, 2013 11:15AM
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It's quite possible the Bubble in the Stock market crashes First ....and if it does, rates will stay low for the foreseeable future.
Mar 28, 2013 9:24PM
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Look people ,what do you expect .lets look at the Big picture .We're 16+ trillion in debt .One way to offset  this is to print more paper ,monotizing our debt (that we are paying ) with higher energy cost and consequently, higher food costs just to name a few. Inflation truly HAS BEEN OVER 100% during the past 6 years. And a good portion of our debt is held by foriegn countries who will lose far more than us the USA citizens.

So let the bond prices plummet ,and invest in cold hard GOLD while its at 1500-1600/oz. 

Mar 29, 2013 12:41PM
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Bonds, gold, cash...all bad investments right now.

Stick to equities and real estate.
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