When I was growing up, a trillion dollars was a lot of money. Maybe that's why I think the full-on rout in the bond market, which has shed as much money since the election, is historically significant.
Bonds are caught in nothing less than a textbook "perfect storm," which I think heralds the bitter end of a secular, decades-long bull market.
That's critical for bonds and bondholders, of course, but it's important for the stock market, as well.
Let's take a look at this chart and I'll show you why…
Bonds Couldn't Resist These Forces
The macro "ingredients" for the rout I mentioned are…
- The potential for accelerating inflation due to the aggressive economic stimulus plans of the Republican-controlled White House and Congress are being quickly priced into the bond market. All other things being equal, as the rate of inflation goes up, so do bond yields.
- Money flowing out of the bond market has an attractive alternative in a stock market where traders and investors are optimistic that the regulatory environment and other factors will be pro-business. Remember, money goes where it's treated best. If there were no perceived economic gain for leaving bonds, the money would just trickle out. But the stock market looks positively irresistible by comparison, so it's the new home of $8.2 billion that were in bonds just about a week ago.
- What's more, the probability for a Fed interest rate hike in December is approaching a statistical near-certainty. A few weeks ago, before the November Federal Open Market Committee (FOMC or "The Fed") meeting, I showed a chart from the Chicago Mercantile Exchange (part of the largest futures exchange in the world) that gave a 7.3% chance for rate increase in November and another chart that showed a 63.6% chance for a rate hike in December. As I mentioned, that December number has jumped up into "near-certainty" range. Let's take a look:
What these three factors add up to is a global bond meltdown.
I believe we are entering a period during which bond prices could go down for years – and maybe longer.
My Stealth Profits Trader readers just took in a quick 30% on our ProShares UltraShort Lehman 20+ Year ETF (NYSE Arca: TBT) trade. I don't see that trade turning unprofitable anytime soon, even if we do see some bond price pops in the near future.
Stocks, of course, are a different story…
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.