Is the 35 Year Bond Bubble Finally Bursting?

Thirty-five years ago the US was experiencing some of the worst inflation the country had ever seen.  It was a shock to the economists at that time when an oil embargo on exports to the US caused oil prices to skyrocket.  Inflation soared while the unemployment rate went up as well.  The Federal Reserve was forced to raise interest rates to the highest levels in centuries to combat the runaway inflation.  Ever since that economic phenomenon, interest rates have been steadily declining (bonds prices rising) thanks to loose monetary policy and forgotten lessons from the past.  This long 35-year era could be coming to an end at this very moment.

After every economic downturn, Central Banks around the world have forced interest rates lower and lower to spur higher inflation.  Recently, interest rates have been forced to near zero, or even negative in some cases, with very little inflation to show for it.  This has made the bond market undesirable to investors because they can no longer get a decent return on their investment.  With interest rates now at their lowest point in centuries, and inflation rearing its ugly head once again, it seems like there is no where for interest rates to go besides up.  Because bond prices move opposite of interest rates, bond prices will continue to plummet.  To make matters worse, the Federal Reserve plans to raise the Federal Funds Rate next month.
Further evidence that the bond bubble is on schedule to burst is this chart that shows the cyclical nature of interest rates.  This particular chart only goes to about 2013 and does not capture the full decline in interest rates over the last few years.  Peak to trough and trough to peak can both last decades, which is how long this current bond bubble has been building.  Although the reversion toward the mean might not be as severe as the move from 1941 to 1981, bonds are in for a rough few decades.  


Just like we should have not been discounting the possibility of hyperinflation in the 70’s, we should not be discounting its possibility today.  Mainstream economists like to measure inflation by the rising price of a basket of goods.  However, Austrian economists like to measure inflation as the growth of the money supply because they realize that new money will eventually find its way into the system and then cause prices to rise.  After the 2008 recession, trillions of new dollars were pumped into the banking system and now those dollars are finding their way into the economy.  We are seeing this in the rising costs of healthcare, schooling, housing and more. The dollar has been extremely devalued by this method known as Quantitative Easing, and it very well could lead to hyperinflation.  This is exactly what is going on in Venezuela and Zimbabwe.  Imagine having to bring $1,000 to the store to buy a loaf of bread.  If this reality finds its way to the US, interest rates will rise sharply and the bond market will be crushed.

Diversifying your investment portfolio between stocks and bonds will not do you any good in this environment.  Both asset classes are set to fall in the near future.  Several researchers, including Goldman Sachs, predict that if the 10-year Treasury exceeds a 2.75% interest rate, a stock sell off would be imminent. 

 There are many ways to avoid the bond selloff, including inverse ETFs.  Judging from experience, the average financial advisor doesn’t know about this or won’t tell you about this.  Do your own research and protect yourself from what could be the bursting of one of the biggest bubbles all time.