Worried About U.S. Treasury Bonds

Interest-Rates / US Bonds
Apr 10, 2010 - 02:07 AM

By: Mike_Larson

Stop me if you’ve heard this one before …

First, the Federal Reserve slashes interest rates and floods the economy with cheap, easy money.

Second, some asset class starts to benefit from the influx of that nearly-free cash.

Third, individual investors see all the money being made and dogpile into that asset class like crazy.

Fourth, the market blows up. Investors lose boatloads of money. And the Fed washes its hands of the affair, kind of like former Chairman Alan Greenspan tried to do with housing in Congressional hearings this week.


While in front of the Financial Crisis Inquiry Commission, Greenspan refused to shoulder any responsibility for the toxic debt that sparked the housing crisis.

It happened with dot-bombs. It happened in real estate. And I believe it has happened more recently in long-term debt.

Worse, investors are more exposed to a potential blow up now than at virtually any other time in recent memory! That’s why I worry so much about the bond market — and why you should too.

The Evidence Is Irrefutable — Investors Are Chasing Performance Again

Back in the halcyon days of the housing bubble, Ivory Tower economists at the Fed didn’t see anything wrong. But those of us who actually hit the pavement to see what was going on had no trouble spotting a bubble in the making …

One of the most glaring, obvious indicators?

Investors were piling into residential real estate like never before. Lines snaked around the block whenever some condo or single family home developer threw up a shingle. Cocktail party talk centered on how rich everyone was getting from flipping homes.

Indeed, at the height of the housing bubble in 2005, the share of houses purchased as second homes or investments rather than primary residences hit 40 percent. That was up from 34 percent a couple years earlier and the highest percentage ever, according to the National Association of Realtors.

You knew it couldn’t last — and that all these so-called investors would get creamed. And sure enough, they did.

Now the same “can’t lose,â€