This page has been archived and commenting is disabled.
Is Your Fund Manager Equipped to Handle a Bear Market in Bonds?
In 1980, at the depth of the last bear market in bonds, the 10-year was yielding around 16%. This meant that in general, if you borrowed money at that time, you would be paying more than 18% per annum on the loan (anyone who lent you money instead of the lending to the US Government by buying a Treasury, would be expecting a much higher rate of return for the greater risk).
So, if you’d borrowed $100,000 in 1980, you’d need to pay at least $18K to finance the loan per year (for simplicity’s sake, I’m not bothering to include principal repayments).
Obviously, with interest rates at this level, you’d think twice before taking out that loan.
The great bull market in bonds started in 1983. Since that time the yield on the 10-year has fallen almost continuously.
When looking at this chart it is important to assess two things:
1) The psychological resistance to borrowing money/ investment risk shrank year after year.
2) The overall timeline and its impact on different generations.
For 40 years, with few exceptions, it became increasingly cheaper to borrow money. The flip side of this is that the overall “risk” of the investment world (remember that all investments move in relation to “risk free” 10-year Treasuries) shrank on an almost yearly basis for 40 years.
This was a truly tectonic shift in the investment landscape occurring over four decades. During that period we had the Long-Term Capital Crisis, the Asia Crisis, the Ruble Crisis, the Peso Crisis, the Tech Crash AND the 2008 Meltdown.
Throughout this period, despite these numerous crises, risk became increasingly cheaper. This is truly astounding and can be largely traced to the Federal Reserve (more on this later).
The second item is important because this time period (40 years) encompasses at least 2 if not 3 generations. A 30 year old who shied away from borrowing money at 18% in 1980 was 50 with children in their teens by the year 2000. That individual’s children would grow up in an era in which interest rates were below 10% for their entire lives and below 7% for as long as they could remember.
From an investor perspective, this means that any professional investor who was working in the late ‘70s/ early ‘80s would now be retired (e.g. a bond fund manager who was 25 in 1980 would now be 65). Put another way, there is an entire generation of professional investors aged 22-60 who have never invested during a bear market in bonds (a period in which risk was generally increasing).
In the near past, the last time the Fed raised rates was in 2004. And that was the first rate raise in four years. Put another way, the Fed has only raised interest rates once in the last 14 years.
So not only are we dealing with an investment landscape in which virtually no working fund manager has experienced a bear market in bonds… we’ve actually got an entire generation of investment professionals who have experienced only one increase in interest rates in 14 years.
Moreover, we must recall that throughout 2011-2012, the Fed continually pledged to hold rates at zero until as late as 2016. These repeated statements, made by numerous Fed officials, further inculcated investors with the belief that rates will not be rising anytime soon.
The bottomline: higher rates are coming… and an entire generation of investment professionals are unprepared for it.
This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at http://phoenixcapitalmarketing.com/special-reports.html.
This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.
Best Regards
Phoenix Capital Research
- advertisements -
The FED now owns most all new 30 year Bonds at record low rates. They will be hurt the most if rates rise.
That being said the money they used to buy the bonds was simply created so taking a 50% hit on something you never paid for is not so bad. They get to take the hit over the next 30 years dstributing the 2008 damage far into the future
Another snake oil spin that rides on what Bill Gross (PIMCO) has already called the "New Normal". Apart from the lack of originality, it is far less polished than Gross.
Money Managers have always been nurtured as Predators of Muppets in a hierarchy with Hedgies at the apex. The competition for more lush spaces in the hunting ground shall go on with great clarity as to who are the PREYS.
LOL that there is still an assumption from the writer that since the last few decades that the PREDATORS have been real wealth builders for the underclass.
I guess you have to have funds to need a fund manager.
I guess you'd have to believe your fund manager was looking out for your interests rather than his/her own to follow any advice given.
“Is Your Fund Manager Equipped to Handle a Bear Market in Bonds?” Author is extremely naïve. As most posters have noted, the Fed Bank can NEVER raise rates. Okay, maybe 25Bbs, so they can quickly lower them again when the markets plunge. Auto, housing, boats, furniture, I-Toys sales will all plunge. Loose consumer credit to the barely employed would end, the government wouldn’t be able to fund the $18T debt. More likely, yield on the ten-year will drop to 2%.
How about, “Is Your Fund Manager Equipped to Handle a Bear Market in Equities?” NFW! They all have 95% the same exposure. The rising tide has lifted all boats. Millions are thrilled as $4.5 T in Fed created money flowed into their 401K accounts. Soon the tide will go out and we can see who has been swimming naked. One big fund alone has $3T of exposure. The Fed bankers know they are 99% responsible for keeping the illusion of prosperity going and preventing social unrest. If the markets tank, the politicians will pile onto the blamewagon and roll all over Janet and company. “The reckless Fed raised rates too soon, this depression is all their fault!”
A big distraction is needed and is coming (read war). There is no way the drones and bombers can hit targets without some boots on the ground lasering them. ISIS just needs to kill a couple of our people or capture a couple and parade them on T.V. Down the slippery slope we will go…
couldn't agree more!!
I think people have been writing the same thing about Japan for at least 14 years. Until someone can conclusively show me why the US will take a different path than Japan (and, incidentally, Europe today), I continue to expect TNX to go under 1% at some point.
I think the Fed will try to lift off the zero bound next year, and they might get to 1 or 1.5%, but will be scared right back down by the reaction.
Greenspan tried to normalize rates ( 1/4,1/4,1/4....and blew the whole thing up 2008 )
Lesson learned
Weren't the high USA rates of 1980 caused by Fed Chairman Paul Volcker's war-on-inflation?
If high USA rates are the Fed's cure for inflation, then is Fed Chairman Janet Yellen fighting a war-on-inflation? Wasn't Volcker very vocal about fighting inflation in 1980?
The Volcker war was on wage expectations, we saw prices rise and demamded higher wages. Higher prices were not the problem after all thats real profit. Only when people started demanding 6% wage increases did the hammer come down.
As long no one is after more wages they will not act. When your breakfast box is half the size thats profit not inflation.
You must learn to view the economy from the 1% side
Profit good wages bad
The US didn't have $17trn in debt in 1980.
Debt 1980: < $1trn
Revenue 1980: > $500b
Debt 2013: > $17trn
Revenue 2013: < $2.5trn
1980 ratio 2:1
2013 ratio 6.8:1
duuuuuude, it is an auction, they slurp in all of the money and the auction goes into the stratosphere.
Is that the mechanics Volcker used to achieve it?
That's funny. I turned 25 in 1980, and I only just turned 59 this summer. Where did I go wrong? Why am I not already 65?
well, some of us have had a harder or easier time with so-called "wall-clock time".
Probably, while you had your head up your ass, you fell into an accelerated frame of reference and then returned to the t0 line in an anomalous but explainable situation.
It really is settled science.
- Ned
Lower rates for at least another 3 years, maybe longer. No way rates can rise. There is nothing left to pay it back with... unless the presses are truly opened up.
It seems much more likely that "investment professionals" are even less prepared for the nice double on tbond investments when the ten year hits 1.25%.
You are assuming that this time is not different than the others. I think you are wrong and the explosion you will see will be much worse than simple capitulation.
Yep, if the author had followed through with his analysis and shown that debt levels have risen for as long and faster than interest rates have dropped, you could see that these massive debt burdens are such a burden and drain on the world that demand for loans and ability to pay higher rates, or even existing rates is impossible.
You are correct, I believe that we could see negative nominal rates before it all blows.
You are implicitly saying the Fed will maintain control of the bond market in perpetuity. The Fed is trying to give the illusion of a bid under the dollar by buying bonds to keep rates low. High rates do not mean higher growth; they will come, and they will mean foreigners are demanding higher interest commensurate with holding US fiat notes. Slowly but surely the BRICS are moving away from the dollar. I don't see genuine demand for the dollar holding up beyond short term noise as other CBs go all out on inflation. I see only 'demand' for dollars being that so many contracts are denominated in USD, and when commodities shoot up companies whose raw materials' costs will soar will get hammered, and so will stockholders, who will get margin called, and temporarily they'll need to liquidate into USD. But that is not the same as demand for the dollar as in wanting it as a store of value/prospects of good US economy. And obviously the other 'demand' for the dollar is via the petrodollar hegemony, which is getting cut apart by BRICS arrangements, and the provocative US imperial foreign policy.
With all the inflation out there already unleashed and what will be coming from Japan, Fed, ECB (unless Germany keeps strong) it won't do one much good to have a 'capital gain' as rates go down as the underlying currency will not buy things. Savings--actual foregone consumption that liberates resources for investment--are not abundant, and the only time rates should be low is when investable funds are abundant. The Fed has tried to conjure 'capital' via ctrl-p to give the illusion of a good investment environment.
So far so good with those tbond dividends and cap gains. Sweep em off and buy ever cheaper precious metal. The credit markets are contracting. They are much larger than all of the QE so far. Deflation result. The fed will go zimbabwe after a short bout of deflation. It is a tricky world. Like the old saying "You pays your money and you makes you choice".