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From Teeka Tiwari, editor, Mega Trends Investing: For goodness’ sake, stay out of the bond market. It’s a ticking time bomb…
Banks were once the biggest buyers and sellers of bonds. But that all changed with the Dodd-Frank Act—the big, sweeping legislation that came out after the financial crisis. It increased the capital requirements of banks.
They now have to keep more cash in reserves than before. They also have to cut back on “proprietary trading,” where they trade for their own accounts.
So, they’ve moved out of the bond market.
The liquidity those banks used to provide in the bond market no longer exists. To compound that problem, since 2012, individual investors have put about $1.5 trillion into the bond market via bond ETFs.
Now, why’s that a problem?
First, ETFs operate differently than traditional brokerage firms. They put whatever money they’re given into the bond market.
(If an ETF has $10 billion to put into bonds, it owns $10 billion worth of bonds. That’s it. A traditional brokerage may own $9 billion worth of bonds and have $1 billion in its own proprietary trading.)
Second, individual investors are emotional, and when they make decisions, they usually move in one big mass.
This has set up the potential for a colossal “run” on bond funds. When interest rates start spiking up, people will see their bond funds fall 12%, 15%, or 16%. They’ll panic and hit the “Sell” button.
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As a result, the ETFs rush to try and sell bonds. It’s like an elephant trying to bolt through a mouse hole. It’s just not big enough.
Folks, you’re going to see volatility in the bond market nobody alive today has ever seen before… a new benchmark on volatility.
And you’re going to see catastrophic losses take place in bonds.
If you’ve got a lot of money invested in bonds, I am begging you to take a second look at your asset allocation model.
Think about making some serious changes. If you don’t make your move now, you might not be able to. The illiquidity might be so great—and the paper losses so big—you can’t sell your bonds.
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Remember, we had a period of time last October when there were no bids in the Treasury bond market. This is the U.S. Treasury bond market: the biggest, “most liquid” bond market in the world.
Think about that. There was a period of time when you could not sell your bonds in the open market. Now, imagine if $1.5 trillion in retail bond ETF money decides to “hit the bid.” No one’s going to pick up the proverbial phone (even though it’s all done by computer now). The bids will just melt. There’ll be nobody buying, and the volatility will be gut-wrenching. |
Bottom line: Get out of bonds. They will annihilate your wealth.