Some sobering advice from Wall Street experts as the New Year dawns: The 2009 surge in bond prices represents a bubble that will soon burst —
after all, government debt issuance appears to be turning into an investment scam.
"My biggest fear is the bond market,” says Dan Deighan, founder of Deighan Financial Advisors.
“There is going to be a meltdown," he told CNBC. "It's time to get out of bonds."
The Barclays Capital corporate bond index had gained about 19 percent by the last few days of 2009.
But the tepid demand for recent Treasury auctions shows investors are tiring of bonds, Deighan says.
"I think it's clear with what's been happening in December that it's time to (exit bonds). The yield curve is steepening."
The yield curve, which measures the yield premium of 10-year Treasury bonds over two-year Treasurys, recently widened to a record 2.88 percentage points.
"There's a bubble (in bonds), and I think that bubble's going to burst," Deighan said.
He says investors who wait to trim their bond portfolio will find selling those positions more difficult than selling stocks, as stocks are more liquid.
Meanwhile, Eric Sprott and David Franklin, of Sprott Asset Management, say U.S. debt issuance looks like a scam.
“Our concern is that this is all starting to resemble one giant Ponzi scheme,” the two write in a report to customers.
They note that the Federal Reserve bought $286 billion, or 15 percent, of the new Treasurys issued in fiscal 2009.
“We are now in a situation . . . where the Fed is printing dollars to buy Treasurys as a means of faking the Treasury’s ability to attract outside capital,” Sprott and Franklin write.
Buyers the Fed calls “The Household Sector” purchased $528 billion of Treasurys in the first three quarters of fiscal 2009.
But that category just represents residual buyers whom the Fed can’t identify.
“The fact that the Federal Reserve and Treasury can’t identify the second largest buyer of Treasury securities this year proves that the traditional buyers are not keeping pace with the government’s deficit spending,” Sprott and Franklin argue.
“It makes us wonder if it’s all just a Ponzi scheme.”
Sprott and Franklin aren’t alone in their concern about U.S. debt.
Moody’s Investors Service says the U.S. could one day lose its Triple-A credit rating.
Under its most pessimistic scenario, the U.S. would be downgraded in 2013 if the economy remains sluggish, interest rates appreciate, the deficit continues to balloon and banks that received bailouts are unable to pay the government back.
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