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Peter Schiff: The Bond Market Looks Horrific

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On Tuesday, the Dow Jones dropped nearly 200 points. Gold fell close to 2% and fell below the $1,300 mark. Meanwhile, bond prices dropped as yields on the 10-year pushed above the 3% level.

In his most recent podcast, Peter Schiff said we’re witnessing a bond breakdown as it gathers momentum.

In fact, the bond market had one of its worst days all year Tuesday.

As bond prices fell and yields climbed, the yield spread also narrowed. The 30-year closed at 3.209. That gives us a yield spread between the 10-year and 30-year Treasury of just .13%. Narrowing yield curves generally signal increasing skepticism about the long-term outlook for economic growth and inflation.

Peter wondered why anybody would go further out on the curve and buy a longer-term bond.

What are you getting for 20 years of extra risk? Twenty years of extra inflation risk, extra interest rate risk?”

Peter said the fact that the stock market didn’t see deeper declines is a problem for the bond market.

What normally puts the brakes on a bond market decline is an even bigger decline in the stock market. See, once the stock market really starts to get pounded, then there’s a flight to supposed safety into the bond market. Or maybe people start connecting the dots and think, ‘Wait a minute, the stock market is tanking. What if the Fed has to come in – what if there’s a Powell-put in play. How is the Fed going to put a halt to the decline in the stock market?’ Maybe hint that they’re not going to raise rates, or that they’re going to do more QE, and so that would put a bid into the bond market. But that didn’t happen. Bonds sold off. Stocks were down, but they weren’t down a lot. Not enough to cause anybody to want to buy bonds. So, bonds are going to keep falling.”

Peter said the bond charts look horrific. He thinks they’ve broken out of a consolidation where yields were going sideways after the recent up-move. Now, yields could quickly move to 3.25% or even higher on the 10-year.

I think we’re going to see a faster acceleration of interest rates now that we have broken out of this bullish tart pattern – bullish on yields, bearish on prices.”

And of course, rising interest rates aren’t good news in a world economy built on debt.

Peter reiterated what he said in a previous podcast. Traders don’t seem to get it. They are reacting to climbing interest rates by buying dollars and selling gold. But at some point, they’re going to figure it out and that will be good for gold.

I think ultimately, gold is going to break and it is going to break to the upside because people are going to figure out that what is happening with interest rates is negative for the dollar and bullish for gold.  Again – what is the rise in interest rates going to do to the economy? It is going to undermine an economy that is based on credit, based on debt. Because the cost of financing all the debt that everybody has is going up.”

Peter referenced an article we published about the rising default rate in the subprime auto market to underscore this point.

The heroin is starting to wear off and it exposes all the bad loans that fueled the spending binge on automobiles. Well, a lot of other bad things are going to happen as a result of the backup in interest rates.”

The federal government will certainly experience bad things as interest rates rise. As they go up, the cost of servicing the massive national debt also goes up. That means even bigger deficits.

The fiscal deficit is negative for the US dollar because bigger deficits mean we have to borrow more money. I mean, that is always a negative for the currency. If a government has to borrow more, if it’s running bigger deficits, that is negative for the currency.”

So, we have rising interest rates putting negative pressure on the fiscal deficits and at the same time putting downward pressure on the economy.

Growth is going to slow down as interest rates rise – especially if artificially low rates were what was creating the so-called growth and now you are removing that fuel. In fact, it’s not just a fuel. You’re just now building barricades – you’re applying the brakes.”

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