Why the Bond Market Could Blow Up Any Day Now…

My Comments: The SKY IS FALLING! Actually, it’s not, but many of the headlines suggest it might be. This was published 3 months ago and as you probably know, the bond market has not yet blown up. Lots of things have changed but the bond market is just as boring today as it was then.

Just don’t begin to think it will NEVER BLOW UP. It will change, and you should hope that the change will be gradual. That gives all of us a chance to adjust and become adapted to a different world. Unfortunately, that’s not always how the markets work. Just remember, there are ways to profit from all this, and I can help you, but not with many guarantees.

Brad Johnson, 19SEP14

Since the recession, $900 billion has poured into the bond market because bonds were viewed as a safe place to put money.

But after multiple years of the Fed’s low-interest rate policies, it looks like there is only one direction for bonds to go…

DOWN.

Bonds lose value as interest rates rise.

You already know this… but most consumers don’t.

Already, the Fed is talking about raising interest rates in spring of 2015. Of course, news of an increase will be priced in long before rates actually rise.

What’s the actual impact of rising rates on the bond market?

Just look at the PIMCO Total Return Fund. It’s the largest bond fund in the world.

From May 1st to June 24th (2014), interest rates went up about 1%. At the same time, the Total Return Fund decreased by around 6%.

If a 1% increase in interest rates causes a 6% decline in the value of bonds, what would happen if interest rates went up 2%… 3%… or more?

Keep in mind, this is not a linear progression. At some point panic sets in and the bond market collapses as investors run for the doors. Bloomberg Businessweek reports:

“Wall Street firms are warning clients that if fund investors who view bonds as safe are hit with sudden losses, there could be something akin to a run on the bond market.

“The worry isn’t only that investors’ bottom lines would take a hit. It’s that a mass selloff could swamp the market, with demands for redemptions forcing fund managers to unload their bonds at rock-bottom prices. The ensuing losses would encourage even more investors to redeem, perpetuating the downward spiral.”

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