StockCharts.com - 30 YR Treasury Bond Crash
StockCharts.com – 30 YR Treasury Bond Crash

Not long ago the word “Bond” was synonymous with good. A man’s word was his bond. Even James Bond would surface every few years to save the World on the silver screen. Now it turns out that the Bonds may become the villains. While quietly creeping into nearly every modest, balanced portfolio, bonds of all types have become a financial “weed” in nearly everyone’s investment garden. The weed comparison, at least from the buyer’s perspective, is poor however, because weeds are free, and you are usually looking to get rid of them. Surprisingly though, the analogy between Bonds and weeds holds true from the perspective of the bond issuer; Bonds cost literally nothing, because they are a simple, usually unsecured, IOU payable at a future date. And, because the company issuing the bonds wants to raise capitol, they are looking to “Issue” as many as possible as quickly as possible. Bonds are literally a loan that the entity you are loaning your “investment” to is not legally required to repay.

A Tough Year for the Bond Crop

Since Bonds are widely considered to be among the safest and most prudent investments, it would surprise many to know that not only do they default all the time, but that there are many major players in major trouble right now. Perhaps, some of what they have on the line is yours. Allan Sloan, writing for Fortune, did a very insightful piece into the quiet but quite real crash in the Treasury Bill market this July. On July 5th, he reports, the market price of a 30 year Treasury Bill fell 4.1%. That is the kind of drop that can wipe out a year’s worth of profits in less than a day. It gets worse, however, “When last I looked, the bond was trading at about 83.9% of face value, which means that holders had lost almost six years’ worth of interest in the eight months since the bond was issued. Collectively, holders of this issue, which has a face value of $16 billion, have lost more than $2.5 billion,” says Sloan in his article.

Many More Tough Years to Come…..

By their very nature, Bonds that are issued with low interest rates have an auto destruct gene encoded into their financial instrument DNA. In the world of Bond rates, what goes down; must come back up. Investors won’t be satisfied with 1% or 2% profits, they will demand rates of 8-9% that were common just a handful of years ago. Bonds that have a low interest rate associated with them will have to be sold at a discount when priced against their counterpart bonds that are paying a significantly higher yield. At some point, all of the Treasury Bonds created and purchased during the sub 2% rate days and throughout all three versions of Quantitative Easing will have to be dealt with, and at what discount is only anyone’s guess.

Once you read a few of the “Dirty little secrets of finance” like how bonds and currencies are created, you may want to learn about some other topics, like investing in silver, or investing in gold. In any event, these are not simple markets either, and do demand a due diligence and learned understanding before accounts are opened and metals are purchased.

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