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Why the “Bond King” Has Never Been More Bearish

by Doug Casey, Casey Research:

The bond “super bubble” is coming to an end.

For the last three decades, U.S. bond prices have been in a steady uptrend. This epic bond bull market survived three recessions, the dot-com crash, and the 2008–2009 financial crisis.

Because of this, bonds have become very popular with investors. You can see why in the chart below, which shows the Dow Jones Equal Weight U.S. Corporate Bond Index since 1997. This index tracks the performance of U.S. corporate bonds.

As you can see, a $100,000 investment in corporate bonds 20 years ago would now be worth more than $360,000. What’s more, corporate bonds did relatively well during the violent stock selloffs that occurred in 2000–2002 and 2007–2009.

Many investors have gotten used to making safe and steady returns in bonds.

But it looks like those days are over…

• Over the last few months, bond yields have skyrocketed…

A bond’s yield rises when its price falls.

The yield on the U.S. 10-year Treasury has jumped from a record low of 1.37% in July to 2.23% today. We’ve seen similar spikes in two-years all the way up to 30-years.

The same thing is happening overseas. Yields on French, Italian, and British government bonds have all hit multi-month highs over the last few days.

This is a huge deal. Just four months ago, MarketWatch reported that global interest rates reached the lowest level in 5,000 years.

• Still, you might not be worried about this if you don’t own any bonds…

But you must understand that the bond market is a cornerstone of the global financial system. If it unwinds, it’s going to impact everything from stocks to the economy at large. We’ll explain what could happen in a minute.

But first, let’s look at what some of the world’s smartest investors have to say about this.

• Ray Dalio thinks bond prices have peaked…

You’ve probably heard of Dalio. He manages more than $150 billion at Bridgewater Associates, the world’s largest hedge fund.

Yesterday, Dalio explained why he thinks the bond market’s topped out:

[W]e think that there’s a significant likelihood that we have made the 30-year top in bond prices. We probably have made both the secular low in inflation and the secular low in bond yields relative to inflation.

In the investing world, secular means long-term. In other words, Dalio’s saying bond yields and inflation rates have bottomed.

Now, we know higher bond yields are bad for bond prices. But rising inflation is also bad for bonds.

Inflation measures how fast prices for everyday goods and services rise. The higher the inflation rate, the faster everyday prices rise.

High inflation is obviously bad for the average person. It means the money in their wallet doesn’t go as far. It’s also bad for people who own bonds. That’s because inflation eats away at a bond’s future payments.

• If Dalio’s call sounds familiar, it’s because we’ve been saying the same thing for weeks…

On October 19, we told you that bondholders could take heavy losses if inflation keeps rising. More recently, we’ve shown you plenty of reasons why inflation is likely headed higher.

This is clearly bad news for bonds. Unfortunately, many people are still on the wrong side of this trade. Dalio wrote yesterday:

When reversals of major moves (like a 30-year bull market) happen, there are many market participants who have skewed their positions (often not knowingly) to be stung and shaken out of them by the move, making the move self-reinforcing until they are shaken out.

Read More @ CaseyResearch.com

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