Even Bigger Sell-Off Ahead for U.S. Bond Market?

It hasn’t been too long since I started to warn readers of Profit Confidential about what might happen in the U.S. bond market. (See “Bond Market Shows Signs of Weakness Ahead.”) As I have said many times before, the sell-off in the bond market will start slowly and then eventually pick up speed. And, as predicted, it’s all coming together.

Take a look at the chart of the 10-year U.S. bond prices below:

UST 10 Year Treasury Note Price Chart

Chart courtesy of www.StockCharts.com

The selling in the U.S. bond market has escalated. The 10-year U.S. bonds were trading in a down channel—making successively lower lows and lower highs since the middle of 2012. Recently, after the Federal Reserve, which has turned into a major buyer of long-term U.S. bonds, said it might pull back on its purchases, it all turned. The bond prices started to come down quickly (as you can see in the red circle on the chart above).

Since the beginning of the year, the 10-year U.S. bonds prices are down about four percent—from $131.00 to below $126.00 now. The image elsewhere in the bond market is very similar. The 30-year U.S. bonds are also shifting gears, and the bonds with higher risks, such as junk bonds, are seeing an even steeper sell-off.

Investors are running for the doors, fleeing the bond market at a very fast pace. According to the Investment Company Institute’s data, in April of 2012, long-term bonds mutual funds witnessed an inflow of $24.7 billion. In April of this year, these types of mutual funds had an inflow of only $12.1 billion—51% less. (Source: Investment Company Institute, June 19, 2013.)

In this month, June, it is possible that the long-term bonds mutual funds will witness an outflow for the first time since August of 2011. For the weeks ended on June 5 and June 12, the long-term bonds mutual funds witnessed outflows of $10.8 billion and $13.4 billion, respectively.

As the U.S. bonds prices come down and the bond market faces severe pressure, I see a significant number of mainstream economists missing its implications. Here’s one: the pension funds rely heavily on the bond market; they will face losses as the bond prices continue to slide lower.

The sell-off in the bond market shouldn’t be taken lightly, because it’s much bigger than the equity markets. Investors are fleeing on speculation over when the Federal Reserve will stop purchasing U.S. bonds; if inflation starts to pour into the U.S. economy, as I expect it will, the “slowly declining” bond market will become a “crashing” bond market.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in Profit Confidential, June 23, 2005. Michael was already warning investors of the coming crisis in the U.S. real estate market right at the peak of the boom, now widely believed to be in 2005.