U.S. bonds could be entering dangerous territory. According to Bank of America Merrill Lynch indices, 30-year U.S. bonds have declined more than five percent so far in 2013. Their decline in January 2013 was 4.3%—the biggest monthly decline since March 2012. (Source: Bank of America Merrill Lynch, February 6, 2013.) The following is a price chart of the 30-year U.S. bonds—almost looks like a free-fall: Chart courtesy of www.StockCharts.com Why are the U.S. bonds prices falling? After all, wasn’t the Fed buying the majority of new U.S. bonds issued, thus pushing down yields? There is no rocket science behind this. The fact of the matter is that U.S. debt has increased significantly over the past four years. Just like you wouldn’t lend money to a person who has lots of debt already and poor job prospects, neither do U.S. bonds holders. According to the Congressional Budget Office (CBO), the U.S. budget deficit will decrease to $854 billion in the fiscal year of 2013, after it was over $1.0 trillion for the past four years in a row. As the saying goes, “I’ll believe it when I see it.” (The CBO’s numbers do not include any extraordinary events, like interest rates rising, the government having to take a write-down on student loans, natural catastrophes—they left no room for these kinds of events.) Even if you believe the CBO forecast, this means the “official” U.S. debt will move from its current $16.5 trillion to $17.4 trillion. Looking at U.S. debt in relation to gross domestic product (GDP) paints a worse picture. The $17.4-trillion current U.S. debt would equate to more than 109.3 % of GDP if we assume GDP of $15.8 trillion. (Source: Federal Reserve Bank of St. Louis web site, last accessed February 6, 2013.) Here is what the director of the CBO, Douglas Elmendorf, recently said: “…at this level of debt relative to GDP, our country would be incurring costs and bearing risks of a sort that we have not [had] in our history except for a few years around the end of the second World War.” (Source: Paletta, D., “Debt Rise Colors Budget Talks,” Wall Street Journal , February 5, 2013.) Dear reader, the reality is that the government is still spending way too much and increasing U.S. debt far too much. Let’s call a spade a spade; U.S. debt is simply being bought by the Federal Reserve. Where does the Fed get the money to buy U.S. bonds? Well, it creates it out of thin air—a form of fiat money “madness” with far too few critics! How can this end well? It won’t. And maybe that’s what rising bond yields are telling us. Michael’s ... Read More