Category

Bond bubble

Global Economy

The Painful Price of Subsidized Money

Bond yields have been generally declining, and the market as a whole is set up for them to continue the trend.

Not bad, right?

Wrong.

It's extremely dangerous – to all investors – because it can't go on forever. It's not a question of if this might happen, it's a question of when.

Fortunately, there's one antidote to this poisonous path. But first, you need to see the path we're on and its dire consequences.

Bonds are integral to the entire financial system and the economy as a whole. At some point sooner rather than later, bond yields will start rapidly increasing – and the bond market will become a Death Star, devastating the global economy.

Since 2008, and to a large extent since 1995, the bond market has been subsidized by the Federal Reserve, which has consistently printed more money than the economy demands – with broad money supply rising by over 8% a year since 1995, compared to a nominal GDP rise of less than 5%.

That subsidy has been hugely increased since last September, with the Fed buying $85 billion monthly of long-term Treasury and mortgage agency bonds.

Your Money

Warning: How the Bond Bubble Will Secretly Sabotage Your Retirement

A tool intended to make retirement investing easier may result in many Americans taking an unwitting hit to their portfolios when the bond bubble finally pops.

We're talking about target-date funds, designed to be "set it and forget it"-style retirement vehicles for people who don't want to bother with actively managing a portfolio.

Such funds usually include a combination of stocks and bonds, with the ratio dependent upon the investor's retirement date.

When retirement is 25 years or more in the future, target-date funds typically hold about 90% stocks and only 10% bonds. But as time goes on, target-date funds shift the balance more in favor of bonds, with the intent of reducing exposure to risk and volatility.

By the time retirement is 15 years away, the balance is 75% stocks and 25% bonds. And when that nears to just five years away, bonds generally rise to about 40% of the portfolio.

So as we edge closer and closer to higher interest rates and the negative impact that will have on bonds – the dreaded bond bubble – many workers approaching retirement are slowly adding more and more exposure to it.

What's more, many future retirees may not even know it.

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