The Bond God Calls the Bottom in Interest Rates
A new record for negative rates... Another warning on Treasury bonds... The 'Bond God' calls the bottom in interest rates... More bad news for one of our favorite whipping boys...
Regular Digest readers know what's happening in the markets today is not normal...
Central banks have embarked on the biggest monetary experiment in history. They've pushed short-term rates to zero (or below)... they're buying up billions of dollars of bonds and other assets every month... and they have turned the financial world upside-down in the process.
There is now more than $13 trillion of global debt trading with negative yields – meaning these bonds charge, rather than pay interest – and the amount has been growing by the day.
Yesterday, German railway operator Deutsche Bahn became the first non-financial company to issue debt in euros with a negative yield. The five-year debt was priced with a negative 0.006% yield.
Not to be outdone, the German government became the first-ever eurozone nation to sell sovereign bonds with a negative yield...
The 4 billion euros' worth of 10-year German "bunds" were sold with a yield of negative 0.05%. This is an incredible development...
The vast majority of the world's negative-yielding long-term debt wasn't actually sold with negative yields. Yields fell below zero as bond prices soared. (Remember, bond prices and yields move inversely. Yields fall as prices rise, and vice versa.)
Before this, only Japan and Switzerland had sold new negative-yielding 10-year debt. Japan auctioned a 10-year bond with a negative yield in March, while Switzerland issued a negative-yielding 10-year bond in April.
But 10-year German bunds are a much bigger deal... They are the benchmark debt of Europe, and have long been considered among the safest assets in the world after U.S. Treasurys.
It appears foreign capital is starting to flee Europe and Japan for the (relatively) big yields of U.S. Treasurys, corporate bonds, and even stocks.
As we've discussed, this could eventually force the Federal Reserve to push rates into negative territory in the U.S. as well... triggering the final collapse of the global paper-currency system... and setting off a historic rally in gold and silver.
There's just one problem with this assumption in the near term...
As our colleague Jeff Clark shared last week, the chart of U.S. Treasury bonds looks ominous. He says it's forming a bearish pattern that often leads to a significant downside move... which would push interest rates higher from here.
In addition, we note...
The latest Commitment of Traders data show speculators (the so-called "dumb money") are holding their largest collective long position in Treasury bonds in 21 years... while commercial traders (the "smart money") are holding their largest short position in Treasury bonds in 21 years...
Several measures of Treasury market sentiment show investors are more bullish than they've been in years...
And the financial media are suddenly awash in stories about the remarkable gains in bonds this year, and why the rally in bonds – and the plunge in yields – is likely to continue.
In short, thanks to central bank manipulation, boring bonds have suddenly become exciting speculative vehicles. And U.S. Treasury bonds in particular – which many believe could be the next target of foreign central banks and investors – are more loved than they've been at any time in recent history.
These signs suggest the rally in bonds could be peaking – meaning the plunge in interest rates could be ending – at least in the short term.
Sure, there are legitimate reasons why this trend should continue... And perhaps the unprecedented central bank easing programs mean the usual indicators are no longer applicable.
But we're still skeptical. History shows us there are always logical and convincing reasons why "this time is different"...
For example, in the late '90s, everyone loved Internet stocks. If you were an investor at the time, you may remember there were plenty of reasons these stocks weren't expensive and could only go higher... Back then, they said profits didn't matter in the "new economy." It was all about clicks and "eyeballs."
In the mid-2000s, everyone loved housing, and there were plenty of reasons it wasn't expensive and could only go higher. How many of you remember hearing folks say things like, "They aren't making any more land"?
Today, a similar situation could be playing out in bonds.
We see that even folks like us – who think most bonds are too expensive and risky to buy today – generally agree that central bank easing is virtually certain to push yields lower. And that makes us nervous...
Who knows... maybe it is different this time. But we wouldn't bet on it.
History suggests at least a temporary reversal of this trend is likely soon...
"Bond God" Jeffrey Gundlach – the CEO of investment firm DoubleLine Capital – is even more bearish on Treasurys...
Last week, Gundlach called the 1.4% yield on the 10-year U.S. Treasurys "the worst trade location in history." In an investor webcast yesterday, he went even further...
Gundlach doesn't just believe bonds are forming a near-term top... He thinks the entire, decades-long bull market in bond prices is ending. And while he doesn't think yields will soar higher immediately, he doesn't believe rates will go much lower.
He agrees that sentiment has become extreme. He says he has fielded more investor questions about buying Treasurys recently than at any other point in his career. He also noted that no one he talks to thinks interest rates can go higher today... and said it's often when most people say something "can't happen" that it's most likely to occur.
What scenario could set off this massive reversal? Gundlach thinks it could be an unexpected move from central banks...
Specifically, he thinks central bankers could soon give up on bigger and bigger quantitative easing ("QE") programs – which clearly haven't worked to increase inflation – and move to so-called "helicopter money."
In simple terms, "helicopter money" is money printed by the central bank and given directly to consumers or the government to spend. Unlike QE, this money wouldn't go into bonds and financial assets... it would go directly into the economy.
Instead of asset price inflation like we've seen over the past several years, it would create consumer price inflation... higher prices for things in the real economy.
Said another way, helicopter money is almost guaranteed to create inflation. And as anyone who lived through the 1970s will remember, inflation is terrible news for bond investors... and great news for gold investors.
Which central bank could be the first to try it? Keep an eye on Japan...
As we mentioned on Monday, former Fed Chairman Ben Bernanke – who famously wrote a paper in 2002 recommending helicopter money as a fail-safe way to beat deflation – reportedly met with Japanese government officials this week to discuss new "stimulus" efforts...
Elsewhere in the market, the news for electric-car maker Tesla Motors (TSLA) isn't getting any better...
The Wall Street Journal reports the U.S. Securities and Exchange Commission ("SEC") is probing whether the company breached security laws when it failed to disclose a fatal crash in May to investors. From the Journal...
Tesla alerted the National Highway Traffic Safety Administration, the U.S. car-safety regulator, to the crash and investigated to determine whether the car was using the company's Autopilot system, which lets cars drive themselves under certain circumstances. But Tesla didn't disclose the crash to investors in a securities filing.
The company says that the event didn't require disclosure – even in the 45-page, 22,761-word filing for its latest $2 billion secondary stock offering, which included more than $500 million worth of stock from CEO Elon Musk – because it "wasn't material."
This week, another Tesla vehicle using the company's auto-driving system drove itself off the road in Montana.
But that isn't the only potential trouble coming Tesla's way...
News service Reuters reported yesterday that Musk had "bandied about" the idea of combining Tesla with solar-panel installer SolarCity (SCTY) with some of his biggest shareholders over the years.
We called the offer to buy SolarCity an obvious conflict of interest. But it could be even more than that. As Reuters reported on Tuesday...
In 2000, the U.S. Securities and Exchange Commission (SEC) formally banned company officials from selectively disclosing nonpublic, material information – such as details about profit forecasts, new products or deals – to investors.
Talking about general strategies and ideas with investors does not violate the rules, though. Moreover, a company "is not prohibited from disclosing a non-material piece of information to an analyst, even if, unbeknownst to the issuer, that piece helps the analyst complete a 'mosaic' of information that, taken together, is material," according to an SEC discussion of the rules.
In this case, Fidelity Investments Portfolio Manager Gavin Baker boosted his portfolio's stake in SolarCity by 20% in May... just weeks ahead of the deal... even though the stock was his portfolio's biggest loser.
Surely, Baker wasn't one of the institutional investors with whom Musk "bandied about" the idea of the merger...
And finally, just this morning, Tesla announced it's slashing the price of its Model X crossover vehicle – the second time it has done so this year – citing lower-than-expected sales.
By now, all Digest readers should be aware of the critical problems at Tesla. As Porter and his team have written in Stansberry's Investment Advisory, the company is doomed...
It requires government support and huge infusions of cash to survive... It has repeatedly failed to meet its lofty goals... and it's now drawing the attention of regulators.
Stansberry's Investment Advisory subscribers can read Porter's latest update on Tesla and SolarCity in the June issue right here.
Finally, as we mentioned last week, Porter and his team reveal their first "Magic Stock" recommendation in that same issue...
This is a stock you can safely take a big position in today and potentially compound your wealth at high rates of return for decades... no matter what happens to the economy, the U.S. dollar, or the stock market.
Porter says it is the absolute best – and safest – opportunity for new money today. It's still trading under Porter's precise buy limit... but it likely won't be for long. Click here for the details.
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