What Happens When the Bond Bubble Pops?

Celsius Network, founder and CEO Alex Mashinsky calls the bond market, “the biggest bubble that hasn’t burst yet.” And when the massive bond bubble pops, that’s when the real earthquake begins.

The US Treasury Department is pumping out bonds like there’s no tomorrow. It announced this week that it plans to borrow $2.99 trillion in this quarter alone. The projected borrowing for fiscal 2020 comes in at a staggering $4.48 trillion.

All of these Treasuries are pouring into an already bloated bond market. As the stock market crashed in response to the growing coronavirus pandemic and investors scurried into safe havens, demand for bonds surged. Prices spiked and interest rates fell to record lows.

As the stock market began to tank in late February, Peter Schiff warned that the bond market was already a great big bubble poised to pop.  He pointed out that the yield on US Treasuries is actually below the official government inflation rate.

Even if you accept the government’s word for what inflation is, the yield on US Treasuries is negative. At the same time, the US financial house has never been in worse shape. The national debt is $23 trillion and rising rapidly with no end in sight and no appetite in Washington, either from the Democrats or the Republicans, to do anything about it. So, there is no plan, or nobody is even pretending to have a plan, to bring the deficits down because nobody cares. … The United States has never been less creditworthy than it is right now because we have more debt than ever before, and the future trajectory of the debt is going to skyrocket and nobody gives a damn or is even pretending to give a damn.”

The United States’ economic house is in even worse shape today. The national debt zoomed past $24 trillion less than a month ago. By the end of the quarter, it will likely be well north of $27 trillion and climbing.

There were problems in the bond market even before COVID-19 and people were warning that it was a bubble. Last summer, former Reagan administration Office of Budget Management Director David Stockman called the bond market the mother of all bubbles.

Today there is even more money in the bond market. The yield on the 10-year Treasury is well below 1%. And yet people keep buying bonds. Given the market conditions, bond yields should be much higher considering the likelihood inflation will go much higher in the future, along with the increasing possibility that the US government defaults and has to restructure its massive debt. Schiff warned about this back in February.

The fact that prices are so high despite the fact that fundamentals are so low, is clear evidence, indisputable evidence, that the Treasury bond market is a bubble.”

In an interview with Kitco News this week, Mashinsky made a similar point, noting that there are “tens of trillions of dollars” in the bond market yielding near all-time lows.

The 10-year is half of one percent and the 30-year is at all-time lows. That is where the real earthquake hasn’t happened yet. This is where the mega bubble is going to burst. I’m not sure even the Fed has enough money to unravel this bubble when people actually stop using bonds.”

The Federal Reserve is a big part of this equation. It is currently backstopping the bond market with its quantitative easing program. In just seven weeks, the central bank purchased $1.448 trillion in US Treasury securities. And in the process, it created trillions of dollars out of thin air and injected them into the economy. This is debt monetization on a massive scale.

Without the Fed, bond prices would be much lower and interest rates would spike. The Fed’s intervention is keeping the air in the bond bubble. But if the rest of the world stops buying bonds, the Fed won’t have enough air to keep the thing inflated. And without a healthy bond market, the federal government can’t borrow the trillions of dollars necessary to finance its massive deficits. It’s a line of dominoes and the first one is teetering.

Mashinsky said the unrestrained money-printing could eventually catch up with the US and have a devastating impact on the economy.

There’s a very high chance of a debasement of the US dollar. And it’s not just about losing value; it’s also about the US dollar losing its power as the reserve currency of the world. The secret to the success of the US economy is the fact that for every dollar we use in our economy, there’s three or four dollars that are used by the rest of the world in their own transactions. Seventy percent of all global transactions are denominated in dollars.”

We’re already seeing calls to dethrone the dollar rumbling out there.

Mashinsky called the idea that the US can just keep printing money with no consequences “naive.”

The Fed is going to flood the market with at least $10 trillion because they keep saying that they will do whatever it takes. The central bank added more assets in one month than they did in over a hundred years. So ask yourself, how long can you do that before everyone else around the world loses trust in your currency? After all, it’s just paper. And accumulating a trillion dollars a year is definitely not something that is reversible. At some point, people will stop buying our treasuries; they’re going to stop lending us.”

This dovetails with what Peter said a couple of months ago.

Anybody buying our debt at these prices thinking they’re doing something safe is a complete fool. And that is exactly what defines a bubble.”

Mashinsky said that if the bond bubble does burst ” a lot of those assets are going to run into gold.” He projects the yellow metal will climb to $3,000 by the end of the year, echoing Bank of America’s 18-month forecast. But Mashinsky says gold could climb even higher.

That is the fork in the road that we’re facing. If you can see in the future, you would know if gold is going to be $10,000 or only $3,000.”