Our bold prediction that US bond investors will see losses in 2012 has still yet to bear out. Last year we shied away from such a bold prediction because it’s so hard to guess when this 30 year bull market will turn. But turn it most certainly will….the question is when?
With 10 year Treasury interest yields bouncing around just over 2%, there’s not alot of room for the bull to continue. Yet, if we had made this prediction last year, we would have been dead wrong because bond investors saw one of the biggest gains of any sector last year. When this market does finally turn, being on the right side of this tidal wave will be one of the most important financial moves you can make.
People that know how to profit from interest rates heading higher will make extreme profits. Unfortunately, most people will be caught unaware of this monumental shift and will be hurt pretty badly by it. Bond holders will get hit hardest. It’s very difficult to say when this big shift will happen.
To say that 2012 is the year that interest rates (and therefore bond yields) will start heading higher is a throw of the dart as much as anything. Mainstream taking financial heads will tell you that it will probably not happen as early as this year because first the economy has to fully recover, and then it has to look like it is overheating, and only then will the Fed raise interest rates.
Another such theory is that the Fed will only increase interest rates once inflation concerns threaten. However, this ignores the fact that inflation has already surpassed what Ben Bernanke used to say was his target. he now has new higher inflation targets. Basically, you can’t believe what he says. Inflation is rampant in most parts of the economy although it is dormant in the biggest sector (real estate) which brings down official CPI.
Both these theories have at their heart the idea that the Fed controls interest rates. We believe that theory will be shown to not hold water at some point, and it’s quite possible the second half of 2012 could be the beginning of this. The Fed only controls short term interest rates. Longer term rates are set by the market. The Fed does do alot to manipulate rates by being the largest buyer and seller in the market, however, if the market were to panic in a way that was too big for the Fed to control, rates could turn sharply higher beyond the control of the Fed.
There would be more sellers than buyers and the stampede would quickly frighten others to sell. The only thing the Fed could do to stop this would be to announce another large QE project. This would scare more bond holders and things could quickly get out of control.
All of this could happen much faster than most people realize, and we believe there’s a probability that we will see this in the next couple years. Will it start this year? It certainly could and it might, but our prediction doesn’t go that far. We’re simply guessing that this is the year that rates start to turn up.
Of course, if all the focus stays on Europe’s problems or perhaps refocuses on Japan’s problems, we could easily be wrong in this 2012 prediction. But it’s a certainty that rates won’t stay this low forever. And when you do the math on the US debt and deficits, you quickly realize that their unwinding will produce devastating consequences for those unprepared (and extremely profitable ones for those who are ready.)
This is the 20th post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & 
European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash,12) War with Iran, 13) Jewish Perspective on Iran, 14) Commodities to End 2012 Lower, 15) Where Will Gold Go Next?, 16) Gold, Should you Wait?, 17) Will Silver Move Higher?, & 18) Why Buy Silver Now?, & 19) Oil Prices to Explode Higher.