The Trigger Has Been Pulled, The Slaughter Of Bonds Has Begun
Michael T. Snyder | Jun 26, 2013 03:53AM ET
What does it look like when a 30 year bull market ends abruptly? What happens when bond yields start doing things that they haven't done in 50 years? If your answer to those questions involves the word "slaughter", you are probably on the right track. Right now, bonds are being absolutely slaughtered, and this is only just the beginning. Over the last several years, reckless bond buying by the Federal Reserve has forced yields down to absolutely ridiculous levels. For example, it simply is not rational to lend the U.S. government money at less than 3 percent when the real rate of inflation is somewhere up around 8 to 10 percent.
But when he originally announced the quantitative easing program, Federal Reserve Chairman Ben Bernanke said that he intended to force interest rates to go down, and lots of bond investors made a lot of money riding the bubble that Bernanke created. But now that Bernanke has indicated that the bond buying will be coming to an end, investors are going into panic mode and the bond bubble is starting to burst. One hedge fund executive told time to end the bond buying .
The Basel-based BIS - known as the central bank of central banks - said in its annual report that using current monetary policy employed in the euro zone, the U.K., Japan and the U.S. will not bring about much-needed labor and product market reforms and is a recipe for failure.
"Central banks cannot do more without compounding the risks they have already created," it said in its latest annual report released on Sunday. "[They must] encourage needed adjustments rather than retard them with near-zero interest rates and purchases of ever-larger quantities of government securities."
So expect central banks to start scaling back their intervention in the marketplace.
Yes, this is probably going to cause interest rates to rise dramatically and cause all sorts of chaos as the bubble that they created implodes.
It could even potentially cause a worse financial crisis than we saw back in 2008.
If that happens, the central banks of the world can swoop in and try to save us with their bond buying once again.
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