Peter Schiff: A Very Violent Move in the Bond Market

Former Reagan administration OMB Director David Stockman has called this the “mother of all bond bubbles.” Has that bubble popped? That remains to be seen, but bonds got hammered last week.

Bonds have pretty much moved in tandem with gold over the last several weeks as perceived safe-haven trades. Peter Schiff talked about it in his latest podcast, saying he thinks the bond market is eventually going to decouple from gold.

Bond prices have dropped in the neighborhood of 5 to 6% recently. Peter said this wouldn’t be considered that big of a deal in the stock market, but when the price of a bond falls 5% in a week, especially a Treasury bond, that’s pretty significant. Investors don’t expect their “safe” asset to decline that much.

Considering a lot of investors are playing the bond market with the expectation of cashing in on rising prices in the short-term, not to hold the bond to collect a paltry one-point-something percent interest, the recent decline is problematic.

Peter has been saying the riskiest thing you can do is buy bonds

I mean, if the choice were US stocks or US bonds, I’d take US stocks. Now, fortunately, I have other choices because I think US stocks are expensive too and they’re going to go down, but they’re not as expensive as bonds.”

A lot of investors justify the price of stocks based on their relationship to bonds. They say relative to interest rates, stocks aren’t expensive. But this is relative to bonds that are extremely expensive.

The question is how long can the bond bubble continue to inflate? Because once the bond bubble pops and interest rates rise, well that changes the valuation of stocks. So, the only way you can that stocks are not overvalued is if you assume interest rates are going to stay down permanently. I have never made that assumption. I believe that interest rates are going to skyrocket. They have to.”

Peter said when that happens, stocks will follow bond prices lower.

Here’s another indication of just how much bonds have moved. The market retraced 30% of the decline in interest rates over the last 10 months in just one week.

So, this has been a very violent move in the bond market.”

The drop in bond prices has also coincided with a correction in the prices of gold and silver. The yellow metal fell back below $1,500 last week and has hovered in that neighborhood since. As Peter noted, investors have been treating both bonds and precious metals as safe-havens. Suddenly, investors aren’t as worried about the economy and the trade war, so the price of these havens is coming down. But Peter said people need to realize there is a huge difference between gold and silver, and bonds.

If the real threat is not just an economic slowdown, but a rise in inflation, if what’s coming is stagflation, if the next recession is going to look different than the prior recession, where you see a big increase in consumer prices — in that type of environment, the worst place to be is bonds and the best place to be is precious metals.”

Peter said that the fact these safe-havens aren’t diverging indicated investors don’t understand what is coming.

There are basically two reasons the mainstream has become more optimistic. In the first place, there seems to be a cooling off in the trade war rhetoric. Second, some people see some optimism in some of the recent economic data. Peter breaks that down through the rest of the podcast.