“Bonds have seen their best days.”
– Bill Gross in a Bloomberg Radio interview, March 25, 2010
Bill Gross is the billionaire who manages Pacific Investment Management Company, the world’s largest bond fund. According to Thomas R. Keene and Susanne Walker, writing for TheBurningPlatform.com, the U.S. has about $10 trillion of bonds to issue over the next few years.
Bill Gross doesn’t want to buy those bonds. Foreigners don’t want to buy them. U.S. investors have been pouring money in bonds — missing the stock market rally — because they think that Treasuries are a safe haven. But how long is that going to last when they realize they can get burned in the bond market just as easily as they previously got burned in the stock market?
How about you, do you want the lend the government money at a less than 4% yield for 10 years or more? I didn’t think so.
The bull market in bonds is about 29 years old:
It began in 1981 with a 10-year Treasury yield — according to Keene and Walker — of 15.8%. It reached a peak in December of 2008 with a record low yield of 2.09%. Yesterday, the 10-year yield was 3.87%.
With trillions of dollars to borrow and with the bond market saying that it’s safer to lend money to Warren Buffett than to the U.S. government I think the almost three decade bull market for bonds is running on fumes and, indeed, may have peaked at the end of 2008. If so, bonds could be in the very early stages of a very long bear market — maybe as long as the bull market lasted.
My philosophy for developing long-term investment themes is simple. Money around the world will tend to move from what is overvalued to what is under valued. That was my premise for getting interested in gold in March of 2003. Gold had been in a bear market since 1980. It ended in 2001 and started going up in earnest in 2003. Gold (along with other commodities) was grossly undervalued. I knew that’s where money would flow.
The bear market in gold lasted about 21 years. I don’t see any reason to believe that the bull market won’t last for a similar length of time. And with gold more than tripling since 2003 it’s so far, so good.
If long-term Treasury bond prices have topped out — and I’m betting that they have — then we could be entering a new era which will be accompanied by a very long trend in rising interest rates and, therefore, falling bond prices.
So if you believe that a bear market for bonds has commenced how do you play it?