Six Days Until Bond Market Crash Begins

by EconMatters, EconMatters.com

Run for the Exits

Early on Thursday morning, realizing this was going to be a robust selloff in equities, the ‘smart money’, i.e., the big banks, investments banks, hedge funds and the like, ran to the old staple of buying bonds hand over fist with little regard for the yield they are getting paid for stepping in front of the freight train of rate rises coming down the tracks.

FOMC Meeting & Press Conference

Just six days away from the most important FOMC meeting in the last seven years, and another 300k employment report in the rear view mirror, this looks like an excellent place to hide for nervous investors who have far more money than they have grains of common sense. Newsflash for these investors, yes markets are over-valued, and you need to get out of Apple, and about 100 other high flying overpriced momentum stocks, but you can’t hide out in bonds this time. That party is over, and next Wednesday’s FOMC meeting is going to make this point abundantly clear.

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Cash is King

There is no place to hide except cash. You should have thought about that before you gorged yourself on ZIRP to the point where you have pushed stocks and bonds to unsupportable price levels, and you keep begging for the Fed to stall just another six months, so you can continue to buy more stocks and bonds. Well you have done an excellent job hoodwinking the Fed to wait until June, you should thank your lucky stars you have done such a good job manipulating the Federal Reserve; but just like the boy crying wolf, this strategy loses its effectiveness over time.

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Throwing another temper tantrum right before another important FOMC meeting hoping that Janet Yellen will be alarmed by these Pre-FOMC Selloffs to put off another six months the inevitable rate hike, this blackmail strategy has run its course. The Fed is forced to finally start the Rate Hiking Cycle after 7 plus years of Recession era Fed policies by an overheating labor market.

Denial is a Powerful Drug

You knew this day was going to come, but most of you are still in denial. What the heck were you buying 10-year bonds with a 1.6% yield five months before a rate hike?? You only have yourself to blame for the 65 basis point backup in yields on that disaster of an “Investment”. But really what were you thinking here?? That is the problem when the Fed has incentivized such poor investment decisions and poor allocation of capital to useful, growth oriented projects over the past 7 plus years of ZIRP that these ‘investors’ don’t think at all, they have become behaviorally trained ZIRP Crack Addicts!

But the Dollar is Strong, our Currency is holding too much of a store of its value

They can cry over the strong dollar, have a couple of 300 point Dow Selloffs, scare monger over Europe or Emerging Market currencies, but the fact is that the due date has come on your stupidity. You bought all this crap, and now you have to sell it! Well too freaking bad, boo hoo, you shouldn’t have bought so many worthless stocks and bonds at unsustainable levels in the first place. Well the Fed cannot save you from your stupidity forever, and that day of reckoning has finally come, rates are going to rise in the United States of America!

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D-DAY for Bondholders

Six more days and counting until all those hiding out in Bonds will start to realize that the Fed Funds Rate is going to be higher than their precious yield play of the worthless paper that they are holding onto for dear life. Like a junkie in a state of denial with their crack pipe and there’s no more ZIRP to save them from their poor investment decisions. You play with fire long enough, and eventually you get burned!

I have no sympathy for anybody who buys bonds at these levels, this isn’t sound investing, this is just pure stupidity. The last six weeks we are witnessing just the first stages of this stupidity play out in the bond market. This backup in yields is just getting started here in the United States, the storm is really going to get dark once 10-year yields break above the 2.38% resistance level. The stops alone are going to move yields to 2.7% on the 10-Year. Then the fun is just getting started for all those stuck on the wrong side of this trade. In two years the Fed Funds Rate itself will be 3%, where do they think that leaves 10-Year Yields?

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o Many Stuck little Sheep Bond Holders

The positioning for this inevitability is as poor as I have seen in any market. The carnage in the bond market is just going to be gruesome, the denial is so strong, the lack of historical perspective of what normal bond yields look like, and what a normalized economy represents where savers actually get paid to save money in a CD or checking account. The fact that the Fed has so de-sensitized investors to what a normalized rate economy and healthy functioning financial system looks like is probably one of the biggest drawbacks of ZIRP Methodology.

The Federal Reserve, and now the European Union have set the stage for the biggest collapse in bond markets that will make the sub-prime financial crisis look like a cakewalk. This is what is really going on in markets, investors who bought too many expensive stocks trying to get out before the FOMC Meeting next Wednesday. But you aren’t going to be able to hide out in Bonds this time, better find another alternative because the clock is ticking on that trade as we speak!