Yes, the complete title is technically incorrect. However, I want to emphasize a point. Whatever we think the bond market is telling us might be dwarfed by what goes unnoticed by most observers.
Obviously, lower bond prices are synonymous with higher interest rates. Today’s (and this week’s) drop in Treasury bond prices and the correlative increase in interest rates are stark reminders of how quickly the tide can turn in the credit markets. What makes that a real eye-opener is that seven weeks ago, the long bond (TLT) was perched at the relatively lofty peak of 91. At the close on Friday, TLT stood at 83.7, a decline of more than 8%.
Even so, it doesn’t seem that severe unless we look closer. Bond prices are now near their lowest point since the shift in Fed policy four years ago to push interest rates upward from near-zero to levels described as “higher for longer.” At current prices, long-term Treasury bonds are down more than 50% from their peak prices less than five years ago.
We have seen bond prices reach this point three times in the past two years. On the two previous occasions, bond prices have rebounded. They could do so again, but I doubt that will happen.
Current long-term bond prices appear close to breaking down and sending interest rates much higher. It has been twenty years since bond prices traded below current levels, and, conversely, interest rates exceeded current levels. A drop in bond prices now will bring consequences that younger investors are unfamiliar with and won’t be prepared for.
OTHER SIGNS OF TROUBLE
The potential enormity of negative fallout from lower bond prices and higher interest rates was confirmed by big down days in all markets, including stocks, gold, and silver. Only oil was higher. What did you expect?
Also, the U.S. dollar index was up sharply. I expect a strong break above 100 in the US dollar index (DXY), which will be reflected in lower prices across the board for most assets (stocks, bonds, and commodities).
The severity and duration of declines depend on the extent to which the credit markets are affected. Something similar to 2008 is not only a strong possibility, but conditions will likely be worse.
WHAT TO DO
It all depends. If you think the markets will survive and recover, then you could wait things out.
As I said in a previous article, though…
“Thirty percent of investable assets in cash is not harshly negative. For most investors, however, it may be an uncomfortable stretch to have that much lying around, doing nothing. Although when the winds blow, and the rains come, it probably won’t be enough.” (see Buffett’s Cash Cache – $350B Isn’t Chump Change)