From Teeka Tiwari, editor, <Mega Trends Investing: If you want to get an idea of what will happen to the bond market once rates start to rise, look at the recent 60% peak-to-valley catastrophic drop in oil prices (see graph below).
That’s what happens when everyone races for the exits. There wasn’t an analyst on Wall Street who called that drop. Even if there were, they would have been labeled a wild-eyed fear monger.
But that is exactly what is in store for the bond market. When rates begin to rise, it won’t happen slowly. That’s because this has become such a crowded trade. Rates will gun higher as the whole world wakes up to the fact that they’ve taken on massive amounts of risk in their all-consuming pursuit of “safe” yield.
We’ve seen this same boom-and-bust Wall Street thinking play out during the 2008 financial crisis. Except back then, institutions were piling into collateralized mortgage obligations (CMOs) that paid big yields and sported “A” credit ratings.
History proved that those “A” ratings were worthless. When it came time to sell, there were no buyers. The entire market for CMO bonds just evaporated overnight.
As I wrote back in December, the Federal Reserve is still on track to raise short-term rates this year. The recent wild action in the bond market is just a prelude… the “main event” begins on March 17.
Bottom Line: If you own any interest rate-sensitive investments, I urge you to check my sector-by-sector “Red Flag List” right now. Jettison anything you own on the list.