2022 – THE END Of The Greatest Bond Market Bubble In Financial History
The bond market today resembles the stock market in 1998-2000 and the real estate market in 2006-2007!!!
Both Asset Bubbles were predictable and ended badly for investors!!!
How is it possible to make such a claim???
Risk vs. Reward Analysis Based On Valuations
We are at a rare point in history where the risk/reward analysis on bonds is more dangerous than stocks.
This is because the low coupon (relative to INFLATION) = volatility and downside price risk.
Bond prices move inversely to interest rates, and interest rates are BOUNCING OFF ZERO = the theoretical floor.
- As rates decline, bonds rise in value.
- As rates rise, bonds lose value.
There is little room left for interest rates to fall.
THEREFORE:
- UNLIMITED RISK (theoretical short) NO CEILING FOR FUTURE INTEREST RATES (theoretically)
- RISK > REWARD
This problem is further exacerbated by the fact that current low interest rates would cause a modest rise in rates to cause disproportionately large losses that could dwarf any income received in the interim.
The downside risk doesn’t justify the return being offered to accept that risk.
Prudent Risk Management/Asset Management requires managing risk/reward
Today’s low yields imply historically high risk of capital loss.
The Risk To Bond Portfolios Is Extraordinary Today!!!
THEREFORE:
Capital loss risk to bonds is highest when starting yields are low.
Given that yields are at or near all time historical lows, many historical benchmarks for capital losses in bonds are unrealistically conservative.
The future WILL BE far worse than the past.
The financial strategies that have worked in the past won’t work the same going forward. The rules of the game are all changing so don’t fight the current war using the rules from the last battle as your guide.
We’ve entered a NEW ERA where the next 10-20 years will be very different from the past.
Past Performance CAN NOT Repeat.
Using the past as your guide could be dangerous.
This is a multi-decade event, not just a bear market.
The highest stock market valuations in all of recorded history and the lowest interest rates in all of recorded history both precede periods of instability.