Plunging Bond Market Signals Trouble Ahead

April 12, 2022

As Russia appears to be on the verge of defaulting on its debt, the U.S. debt market is also signaling trouble ahead.

Treasury bonds, long considered to be among the safest investments, are rapidly plunging in value as yields surge. The largest T-bond exchange-traded fund, iShares 20+ Year Treasury Bond (TLT), has lost more than 15% of its value year to date.

For a purportedly conservative investment, a performance like this is akin to a crash.

Those who bought government bonds at the beginning of the year for their 2% coupon have now effectively lost seven years’ worth of interest.

It could end up being a lost decade – or worse – for bondholders.

Even at its low point this year, the S&P 500 was down only 13%. Stock market investors can at least hope to be rewarded for enduring the recent volatility in the form of earnings and dividend growth over time.

And holders of hard assets including precious metalscan potentially see massive price appreciation as inflation continues to rise. This week’s Consumer Price Index report is expected to show a jump of over 8%. (Alternative inflation gauges are coming in even hotter.)

Bondholders have no chance of keeping up with the prevailing rate of U.S. currency depreciation. Even though the Federal Reserve Note “dollar” has been rising versus foreign currencies, actual holders of cash and debt instruments denominated in dollars are seeing their purchasing power decline rapidly.

For decades, conventional financial advisors have pitched bonds to retirees, pension funds, and other conservative-oriented investors. Instead of providing security, though, bonds are now serving as instruments of financial blood-letting.

It would be one thing if bonds were included in a comprehensively diversified portfolio that included healthy allocations to gold, silver, and other inflation hedges.

But most institutional portfolio allocators and financial advisors sneer at the idea of including any allocation to hard assets.

Maybe they still believe that inflation will be transitory. But if the “bond bugs” are wrong and inflation remains high in the months and years ahead, then the real losses endured by bondholders will be staggering.

In reality, the gold naysayers were wrong from the beginning. Precious metals are a crucial component in any truly balanced investment portfolio regardless of economic conditions.

Far from being an arbitrary speculation, gold is considered to be a “Tier 1” asset in the global banking system. In a world of depreciating fiat currencies, gold is the ultimate money.

It is also the ultimate hedge against geopolitical turmoil and financial market meltdowns.

The plunging U.S. bond market will have enormous ramifications for real estate, the banking system, the federal government’s balance sheet, and the entire economy. While it is impossible to predict exactly what the fallout will be, a hit to the equity markets and a dip toward recession are possibilities.

So far this year, stocks and bonds are getting clobbered by commodity markets – led by surging energy and agriculture. Although precious metals have yet to show leadership, they are serving investors well by mitigating declines in conventional financial assets.

The worst may be yet to come for bonds. Meanwhile, the biggest gains for gold and silver are likely still ahead.

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Silver has the highest electrical conductivity and heat of all metals.

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