Bond Vigilantes

They used to have something called the “bond vigilantes” keeping the bond market honest and correctly priced.  There weren’t any actual people acting as vigilantes per se, but it was the general tendency of the bond market to adjust for either risk or inflation by demanding a higher rate of interest at a lower price.

The bond vigilantes have been basically asleep now for the last 10 years.  We even have negative interest rates with a great number of bonds issued by governments.  Central banks have taken over this market as a way to inject cheap money into their economies, so that the government debt market is highly artificial with central banks the one big buyer.  Think of that — you actually end up losing money by buying these government bonds and the bonds are sold at a very high price to boot, which is all due to the manipulation by central banks.

I think when the bond vigilantes finally wake up from their long slumber is when this current bull market implodes.  It will happen first in the bond market — you can easily make the case that the bond market today is even a bigger bubble than the bubbly stock market.  With interest rates rocketing higher, you would have huge losses in the bond market because the bond prices would be collapsing sharply — perhaps 50% losses in a short amount of time.  This magnitude of loss would have a ripple effect into the stock market, which would then have panic selling as well.  That’s when the whole house of cards comes crashing down.  Who knows how low both the bond market and the stock market would go?

Just wait for the bond vigilantes to wake up from their 10-year sleep.  Best to be out of both the bond market and the stock market when that happens — or invest in a very good parachute.

If interest rates really start to rocket higher, that would be a good time to short the stock market, in my opinion.  But it is very hard to time these things.  If you are short too early, you will be punished.

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