US Bond Investors Finally Waking Up to the New Reality of Massive Inflation!

By: Money_and_Markets

Mike Larson writes: When the nation's most prominent bond investor, the man who is managing the world's largest bond fund, stops believing in U.S. government debt, it's time to stand up and take notice.

Bill Gross, the blackjack player-turned-bond king, whose words alone can spark rallies and selloffs in the $43-trillion bond market, has actually started betting against U.S. Treasury Bonds!

Gross' Pimco Total Return Fund recently reported a position in government debt of NEGATIVE 18%. In other words, the fund is using derivative positions to “short” Treasuries. And this is the most bearish Pimco has been since at least 2000, according to Bloomberg.

Gross is betting on the same thing I've been warning you about for some time — that bond prices will fall and interest rates will rise. The market's recent action suggests that's just what we're going to see ...

Long bond futures prices were hovering in the low 120s earlier this year. They have since fallen to around 116 — and a few days ago, they breached a critical uptrend that dates all the way back to mid-2007.

Meanwhile, the benchmark 10-year Treasury yield has risen from a low of about 3.31% to 3.75% recently.

Here's why I think this is happening ...

Bondholders Are Finally Waking Up to The New Reality of Massive Inflation!

Previously, bond prices were rising and rates were falling because investors were looking for a “safe” hiding place during the credit crunch. They were so panic-stricken that they were willing to buy long-term bonds no matter what the yield!

But they can no longer afford to ignore what's happening with inflation ...

• Import prices are surging at a 14.8% year-over-year rate.

• Wholesale prices are rising at a rate of almost 7%.

• “Official” consumer prices are climbing by 4%.

• The price of a barrel of oil is around $115 ... the price of a gallon of gas is $3.50 ... wheat has almost doubled ... corn has increased by more than 65% ... and gold costs $900 an ounce. 

From New Delhi to New York, bond yields are not keeping up with soaring inflation.

• Rice prices have risen so much that riots are breaking out from one corner of the globe to another ... consumers are hoarding the key staple ... and even U.S. retailers like Costco and Sam's Club are restricting purchases of it.

• Lastly, REAL interest rates are deeply in negative territory.

Even more telling are reports from the front lines! Take these excerpts from an Associated Press story on Kimberly-Clark — the maker of everything from Kleenex to Huggies diapers (with my emphasis added):

“Chairman and Chief Executive Thomas J. Falk called the first-quarter results a good start to the year despite ‘ unrelenting inflationary pressures ,' especially for fiber and energy ...

“Kimberly-Clark pushed through price increase of 4 percent to 7 percent in February on diapers, training pants, bathroom tissues and paper towels , yet saw no loss of market share to cheaper private-label brands, Falk said ...

“Kimberly-Clark has been more aggressive in raising prices on commercial customers, such as office buildings — sometimes twice a year. Executives said they would pave the way for even faster increases by changing contracts to allow price increases any time, not just when the contracts expire.”

And it's not just Kimberly-Clark, either ...  

• Iron ore and energy prices are climbing so fast, the biggest steelmaker in the world, ArcelorMittal, just jacked up its prices by $250 a ton.

• Nippon Steel is going to raise wholesales prices for steel plate by 10%.

• Cruise line operator Royal Caribbean just raised its fuel surcharge to $8 per day, per passenger, from $5.

The list of companies raising prices spans continents and industries, and goes on and on.

As a result, we're finally starting to see the chain reaction I've been forecasting. Namely, that investors are unloading their bonds and driving long-term interest rates higher.

This being the case ...

Here Are Three Steps You Can Take to Protect Yourself ...

First, I've been telling you to avoid long-term bonds for a long time.  So if you've been following my writings, you shouldn't be holding any.  But if you are still holding long-term paper, I'd dump it — fast .

Second, if you want to go a step further, you can even profit from falling bond prices using certain, specialized funds that “short” bonds.  Martin and I recently recommended one to our Safe Money Report subscribers. [Editor's note: If you'd like to learn more about what Mike and Martin are doing in Safe Money Report , click here ]

Third, higher Treasury yields could also cause even more problems in the housing market. Reason: They will drive up rates on home mortgages, making it more expensive to finance home purchases. The Mortgage Bankers Association's purchase loan application index dropped more than 6% in the most recent week to 357.30 — within a smidge of its 2008 low. 

I'm keeping a close eye on it to see if it cracks further. I think you should, too — especially if you have any remaining exposure to building and lending shares.

Until next time,

Mike

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