“Bonds Have Seen Their Best Days”

March 26, 2010 – Everyone should be taking note that the yield on the 10-year Treasury note this week climbed to a 9-month high.  The T-note is sending a loud and clear message: interest rates are headed higher.

The same message was given this week by Bill Gross, manager of the world’s biggest bond fund, as reported by Bloomberg.  In his view, “bonds have seen their best days” and also importantly, “real interest rates are moving higher.”  He also warned that “sovereign credits are vulnerable at some point down the road”.  

If by “vulnerable” he means default, I wholeheartedly agree.  These defaults would result from the reneging of payments and/or a default through the debasement of currency by inflating away its purchasing power.  Either way, anyone who holds sovereign debt of a defaulter will lose.  The most likely defaulter is the one with the biggest debt and perhaps the most reckless policymakers – the US government.

I still think that British historian Niall Ferguson captured the essence of the situation best with his recent OpEd article in London's Financial Times, which can be summarized by one memorable remark: “US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.”

For my specific trading recommendations, see Trading.

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