Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Gone Are the Days When the U.S. Bond Market Was the Place to Be

Tuesday, March 26th, 2013
By for Profit Confidential

U.S. Bond Market Was the Place to BeIn 1980, the total outstanding debt in the U.S. bond market was about $2.5 trillion—this included municipal bonds, Treasury bonds, money market instruments, corporate debt, and asset-backed securities. Fast-forward to 2012, and the U.S. bond market stands at $38.13 trillion—an increase of more than 1,400%! (Source: Securities Industry and Financial Markets Association, March 7, 2013.)

The chart below shows how the U.S. bond market has ballooned over time.

Outstanding U.S.Bond Market Debt stock chart

              Chart copyright Lombardi Publishing Corporation, 2013;
Data Source: Securities Industry and Financial Markets Association (SIFMA)

As I have written in these pages before, I expect the coming sell-off in the U.S. bond market to start slowly; nothing like what we saw when the key stock indices plummeted in 2008 and 2009. It will be slow and steady, gradually picking up speed.

Bond investors are facing two risks in the U.S. bond market: interest rate risk and credit risk.

The Federal Reserve has been keeping interest rates artificially low since the financial crisis began, while printing an unprecedented amount of new paper money in its efforts to boost economic growth. The Fed will eventually have to raise interest rates to tame inflationary pressures. When that happens, bond investors could face extensive losses. A simple rule of economics: bond prices fall when interest rates rise. The U.S. bond market will be no different.

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The U.S. government is spending with two hands. It has been posting budget deficits of more than $1.0 trillion for the last four years. It won’t surprise me to see another year with a U.S. budget deficit of more than $1.0 trillion. The U.S. national debt is headed well above $17.0 trillion.

Dear reader, it is not a hidden fact anymore: the U.S. government is spending rigorously, while borrowing from the Federal Reserve to stay afloat. Unfortunately, this type of behavior can only go on for so long before our creditors—the bond investors—realize the Ponzi scheme that’s really happening.

As a result of all this, there is already softening in the U.S. bond market. For example, 30-year U.S. bond prices have been declining since November of 2012, having fallen more than 4.5%.

The glory of the U.S. bond market may just be coming to an end. A hike in interest rates is not that far off now. Gone are the days when the U.S. bond market was the place to be.

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  • Jim Beam

    The performance of the stock market since you have been saying its going to fall has done nothing but make you loose credibility. I'm sure there are many people that are kicking themselves for listening to you .

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles