“We know it has to happen. And when it does, we’ll get out.”
One of the speakers at a conference we attended in London last week, a professional money manager, talking about the most important bit of investment information you are likely to get in your lifetime.
He was probably speaking for thousands of his colleagues. All confident that they would be able to spot the turn in the bond market when it happens… and all leave the party in good order.
We’re still in the wee hours of a bear market in bonds that will probably last until the middle of the century. In fact, we’re so early that when the sun finally rises we may find we are not yet in a bear market after all. The action over the last two months – and especially the last two weeks – may be just another of Mr. Market’s famous fake-outs.
(We think Mr. Market is doing a great fake-out job in gold, by the way. More on that tomorrow…)
But in the bond market, it looks like the real thing. The Dow rose 100 points yesterday. Gold fell by a couple of bucks an ounce. And Treasury bonds continued their slide. And, since it has to happen sometime, we will suppose that the bond market has put in its top now. If we are too early… we’ll enjoy a leisurely cup of coffee while other investors are scrambling for the doorway.
Rushing for Exits
Meanwhile, the New York Times reports that the exits are getting jammed:
Wall Street never thought it would be this bad. A bond sell-off has been anticipated for years, given the long run of popularity that corporate and government bonds have enjoyed. But most strategists expected that investors would slowly transfer out of bonds, allowing interest rates to slowly drift up.
Instead, since the Federal Reserve chairman, Ben S. Bernanke, recently suggested that the strength of the economic recovery might allow the Fed to slow down its bond-buying program, waves of selling have convulsed the markets.
The value of outstanding United States government 10-year notes has fallen 10% since a high in early May.
The selling has been most visible among retail investors, who have sold a record $48 billion worth of shares in bond mutual funds so far in June, according to the data company TrimTabs. But hedge funds and other big institutional investors have also been closing out positions or stepping back from the bond market.
“The feeling you are getting out there is that people are selling first and asking questions later,” said Hans Humes, chief executive of the hedge fund Greylock Capital Management.
That, by the way, is our advice. Get out now. You can ask all the questions you want later.
Everyone saw (or still sees) a turn in the bond market coming. Bonds have been going up for 33 years. They can’t go up forever. What can’t last forever has to stop sometime. This seems like as good a time as any.
But everyone cannot get out of their bond investments at the same time in a calm, orderly way. After three decades of bringing investors into the room, no trade is more crowded. When bond prices begin to go down… as they did the first week of May… the longer you wait to get out, the more you will lose.
So what do investors do? They head for the exits. All at once. And the bond market becomes an “owl market.” Everyone wants to sell. But “to who… to who?”
Owls are not trained in English grammar. They don’t know that the preposition “to” is followed by “whom,” not “who.” But they are good investors. And they know a developing disaster when they see one. Clever bond investors chose to stay at the party – even when they saw a little smoke rising in the corner. Now they have to decide what to do.
Some will hesitate… wait too long… and then, every bounce will encourage them to wait longer, hoping to recover their losses. Others will stumble and be crushed underfoot, selling their bonds at panic prices.
Is the panic happening already?
No. We’ve only smelled the first faint whiffs of fear. The 10-year T-note still yields only 2.58%. The really nasty odor will come later… when smoke fills the room… someone hits the fire alarm… and those clever investors find the exits blocked.