The biggest bubble in the world looks like it’s about to pop.
Over the last eight years, central bankers have blown all sorts of bubbles. They’ve blown bubbles in stocks, real estate, and even fine art. But none of these come close to the global bond market bubble.
You see, unlike other financial assets, bonds have actually been in a multi-decade bull market. In July, the yield on the 10-year U.S. Treasury hit an all-time low of 1.37%. (A bond’s yield falls when its price rises.)
Yields on German, Japanese, British, and even Italian 10-years also hit record lows around the same time. But they didn’t stay there long…
• Government bond yields have been rapidly climbing over the last few months…
Just look at the chart of the U.S. 10-year below. You can see its yield has soared from 1.37% to 1.86%. It’s now at the highest level since June.
And that’s just one example. Yields on British, German, and French 10-years have also spiked to their highest levels in months.
• Many investors consider government bonds safe-haven assets…
They buy them when they’re nervous about the economy or other parts of the financial system.
With bond yields on the rise, it might seem like the world is becoming a safer place. But that’s not why yields are climbing.
Today, we’ll show you what sparked the recent bond market rout. We’ll also tell you how to protect and even grow your money during these uncertain times.
• Inflation is making a comeback…
Inflation is when prices for everyday goods and services rise.
That sounds like a bad thing to most people. But that’s not how central bankers think about inflation. They see it as a sign of a growing economy.
That’s why they’ve cut interest rates more than 670 times and printed more than $12 trillion since the 2008 financial crisis.
These “expansionary” policies were supposed to grow the economy, and produce inflation in the process.
• But these measures did nothing for the “real” economy…
The U.S., Europe, Japan, and China—the world’s four biggest economies—are all growing at their slowest rates in decades.
All these policies did was artificially inflate stock, bond, and property prices. But recently, inflation has shown up in other places.
According to The Wall Street Journal, “[d]ata released on Friday showed that core inflation, which excludes food and energy, hit a two-year high of 1.7%” last quarter.
Inflation is also picking up in Europe. In the United Kingdom, it’s soaring. This morning, the National Institute of Economic and Social Research (NIESR), a British think tank, warned that inflation could quadruple in the second half of next year.
Unless you’re a central banker, it’s obvious that higher prices are bad for the average person.
• Inflation also hurts people who own bonds…
Let’s say you own a bond that pays a fixed annual interest rate of 3%. If there’s no inflation, your “real” return (your investment return minus the inflation rate) at the end of the year will be 3%.
Now, let’s say the inflation rate jumps to 2%. In this case, your real return would be 1%.
In short, inflation eats away at bond returns. That’s why the specter of rising inflation has triggered a global government bond selloff.
• People who own long-term bonds stand to lose the most…
You see, long-term bonds are riskier than short-term bonds. This makes sense because there’s more uncertainty about the distant future than the near future.
Also, the future payments of long-term bonds are more vulnerable to rising inflation (and interest rates) than bonds with shorter durations.
Because they’re riskier, long-term bonds pay higher yields. For example, the 30-year U.S. Treasury has yielded almost twice as much as the five-year U.S. Treasury over the last 10 years.
• Long-term government bonds have become very “crowded” in recent years…
Bloomberg reported last week:
Investors seeking relief from central banks’ zero-interest-rate policies have poured into government debt due in a decade or more, swelling the amount worldwide by a record $733 billion this year. It’s more than doubled since 2009 to about $6 trillion, data compiled by Bloomberg and Bank of America Corp. show.
In other words, investors have loaded up on long-term bonds because it’s become nearly impossible to earn a decent return in short-term bonds.
• With inflation picking up, many investors are getting out of long-term government bonds as fast as they can…
Just look at the chart below. It shows the performance of the iShares 20+ Year Treasury Bond (TLT), which tracks the performance of long-term U.S. Treasuries.
You can see that TLT has plunged 9% since July. That’s a huge move for such a short period. Remember, we’re talking about bonds issued by the richest government on the planet…not volatile penny stocks.
• There’s no way to know how much higher long-term government bond yields will rise…
But it might not take much for this to turn into a complete bloodbath. Bloomberg wrote last week:
“Rates are rising from a very, very low base, which means there’s lots of downside and very little upside” for bond prices, said Kathleen Gaffney, a Boston-based money manager at Eaton Vance Corp., which oversees $343 billion. She runs this year’s top-performing U.S. aggregate bond fund and has reduced duration and boosted cash. “If you don’t know how to time it, and I certainly don’t, you just want to get out of the way.”
That means the stakes are high: a one-percentage point increase in interest rates equates to $2.1 trillion in losses for global investors, based on a Bloomberg Barclays sovereign-debt index.
A 1% spike in rates isn’t unheard of, either. According to Bloomberg, they happen about every five years or so.
• We recommend that you avoid long-term government bonds, if possible…
If inflation keeps climbing, investors will sell more bonds. This would push yields higher, which could trigger even more selling.
In short, the recent selloff could be just a taste of what’s to come. And you'll want to be prepared, even if you don’t own a single bond.
• The global bond market is a $100 trillion market…
If it runs into serious problems, those problems will spread to the stock market.
This is actually already happening. The Wall Street Journal reported on Monday:
The Dow Jones Industrial Average fell for a third consecutive month, its longest stretch of declines since 2011. The S&P 500 recorded its worst month since January, and the Nasdaq Composite snapped a three-month winning streak.
Yesterday, U.S. stocks fell again. The Dow ended the day down 0.7%. The S&P 500 fell 0.8%. And the NASDAQ fell 0.9%.
• If you own stocks, take a close look at your portfolio…
We encourage you to get rid of expensive stocks. They tend to fall harder than cheap stocks when the market crashes.
You should also avoid companies that will struggle to make money during a long economic downturn. These include retailers, airlines, restaurants, and any other company that depends on healthy consumer spending.
• You can also protect yourself from big losses by owning physical gold…
Gold is the ultimate safe-haven asset. Investors buy it when they’re nervous about the economy or financial markets. And that’s exactly what they’ve been doing lately.
Yesterday, the price of gold jumped 1.2%. Today, it’s up another 1.4%, and trading above $1,300 for the first time since October 3.
If you don’t already own gold, we encourage you to buy some while it’s still cheap. We suggest that most investors put 10% to 15% of their portfolio in gold. Once you own physical gold for protection, you can think about owning gold stocks.
• Gold stocks are the best way to profit from higher gold prices…
That’s because they’re leveraged to the price of gold. The price of gold doesn’t have to rise much for them to soar.
This year, a 23% jump in the price of gold has caused the VanEck Vectors Gold Miners ETF (GDX), which tracks large gold stocks, to soar 87%.
That’s a huge move for such a short period…but it’s likely just the beginning. During the 2000–2003 gold bull market, the average gold stock jumped 602%. The best ones soared 1,000%…2,000%…even 5,000%.
But there’s something you should understand…
• The financial system doesn’t have to collapse for gold stocks to shoot through the roof…
To see why, check out this brand-new presentation.
It talks about three little-known catalysts that could send gold stocks to the moon. One of these events could cause $3 TRILLION to flood into a small corner of the gold market. Another could change the landscape of the global gold market forever. The third could make it much harder for the average person to get their hands on gold.
In short, these catalysts could create a perfect storm in the gold market. You can learn more about this “trifecta” by watching this FREE video.
Chart of the Day
The Italian bond market is flashing warning signs.
Today’s chart shows the yield on the Italian 10-year government bond. Like other government bonds, the yield on the Italian 10-year has skyrocketed recently. Yesterday, it hit 1.75%…its highest level since last November.
If you’ve been reading the Dispatch, it shouldn’t surprise you that investors are running away from Italian debt. Like the rest of Europe, Italy’s economy is a complete mess. Plus, its banking system looks like it’s about to implode.
But these aren’t the only reasons investors are nervous about Italy. Reuters reported yesterday:
Concern about Italy centres on a referendum on Dec. 4 in which voters will decide whether to approve Prime Minister Matteo Renzi's programme of constitutional reforms to reduce the role of the Senate and the powers of regional governments.
Polls suggest Renzi may lose the referendum, “and that would be very bad news,” said DZ Bank strategist Daniel Lenz.
“Since Portugal passed the DBRS ratings test and Spain now has a minority government, Italy is where the risks lie,” he said.
Nick Giambruno, editor of Crisis Investing, has been closely monitoring the upcoming election in Italy. He, too, thinks that Renzi will lose this upcoming vote. If this happens, Nick says it would set the stage for a complete collapse of the world’s biggest economy.
Most investors have no idea this could happen. They’re not prepared. But Nick has put his readers in a position to make huge gains. To learn how, watch this shocking presentation.
Delray Beach, Florida
November 2, 2016
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