Wednesday, March 21, 2012

Wilbur Ross: Long-Term Bond Bubble Getting Ready to Burst

Billionaire vulture investor Wilbur Ross told CNBC:
I think the greatest bubble that is about to burst is the 10-year and longer Treasury, because the idea that inflation is gone forever and for all time, and therefore these artificially low rates can last, is silly.
There is absolutely no reason to own long-term Treasury securities. Interest rates are heading up across the yield curve short-term rates and long-term rates.

When CNBC notices the problem, you know the crisis stage is imminent. Writes CNBC:
The long run in government debt growth has been boosted by accommodative policies at the Federal Reserve   , which has held its targeted funds rate near zero since the explosion of the financial crisis, keeping government yields low, as well. 
However, the 10-year in particular has begun to creep higher lately, most recently trading at 2.36 percent, its highest level since October. 
That has caused some investors to wonder whether inflation pressures driven by historically loose Fed policy finally will come home to hammer fixed-income markets.


  1. Would say that would put an end to the commodities/stock market rally?

    Or will the FED keep printing even when yields are approaching 4%? At some point, the only way they can keep rates low is to but all the treasuries themselves.

  2. I personally believe that Bereneke has known what he's been doing all along. He's been manipulating the stock market to give the appearance of normalcy while everything is steadily getting worse. He's a student of the Great Depression and I think he knows the Second Great Depression is coming. I know that everybody is pointing towards runaway inflation and that seems logical. But could that be because none of us (or very few) have ever experienced deflation?

    Can someone help me here? What would be the early signs of deflation vs. inflation?

  3. After all, the most significant asset class in the U.S., real estate, has been decreasing in value significantly for years. Who says it will go back up again in say the nest 10 years? I see no sign of it. The primary buying is of foreclosed property at bargain basement prices and there's still a glut of those on the market. Rents are going up so people like me are looking to reduce their monthly cost by buying cheap but this isn't a healthy patter.

  4. This is nothing new. CNBC has been calling the "end" of the Treasury bull market for several years now. And 30-year bonds were the BEST asset class last year, even outperforming gold.

    They will eventually get it right. But if I were following their advice I would already be broke before that time came.

  5. Wouldn't the bursting of the bond market bubble cause a huge collapse in the money supply? Wouldn't it leave many Wall Street banks insolvent? Wouldn't the Fed itself become technically insolvent if interest rates rise?

    The Fed needs banks to increase the money supply. If the banks go under, Bernanke cannot respond with more inflation. Will he bail out the banks? Probably, but that will just raise inflationary expectations even more and lead to yet higher interest rates. While I expect inflation, I'm wondering how long it can be sustained. It seems to me that the most likely scenario is another collapse like 2008 only worse.

    1. Answer is, No it can not be sustained, 2008 was just a blip compared to what is coming, Most likely to get involved with more war to change the headlines and the citizens of America are so brainwashed/conditioned to "so called Patriotism" that it will indeed divert the attention of the masses.

  6. Robert,

    I would expect interest rates to climb at some point. However, with the exceptionally high debt and the out of control deficits (which the CBO stated last year would be one trillion+ each year through 2021) how can interest rates be allowed to rise? The debt service would be impossible.

    My understanding is that interest rates would not be allowed to increase and the FED will continue to monitize through endless QE. With the low 10 year and long bond rates so low, who will lend money to fund the trillion dollar deficits.

    None of the politicians (except Ron and Rand Paul) would ever make the necessary cuts to the budget. Last go-around, the party leaders declared the budget negotiations to reach a "historic" compromise. Yet we all know that there were no real cuts. There is simply no political will to make the hard decisions.

    How is hyper-inflation avoidable? Help me out Wenzel.


  7. Dear Anonymous @ 03:42 PM,

    Deflation is a decrease in the money supply.

    Inflation is an increase in the money supply.

    Hope that helps.

    For more info see:

    1. Inflation and Deflation are not mutually exclusive, they can in rare circumstances co-exist. The circumstances are ripe at the moment for this to occur.

  8. deflation = strengthening dollar

  9. @Anonymous

    Inflation is caused by the policies of governments reacting to avoid deflation. You can bet that Bernanke won't let us suffer a deflationary recession/depression, so expect it to be inflationary.

    The key indicator I think would be how many Treasuries the Fed starts buying to keep the interest rates down. If they let the rates rise, we're headed for deflation. If they try to artificially suppress them, inflation.

  10. My take is the Fed wants to steer a middle course between inflation and deflation and will use its powers to avoid either extreme. Does not this seem to be the outcome over the last few years?