Beware of the bursting of the bond bubble, says legendary hedge fund investor, George Soros, in a recent interview. The Feds massive expansion of the monetary base will be hard to reverse, he asserts. The moment this fear of deflation turns into a fear of inflation, you’ll find interest rates rise in the long end …
Soros joins a lengthening list of luminaries warning of a tumble in government bond prices (which I am looking to playwith exchange traded funds that track the inverse of bond prices):
“When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s,”writes Warren Buffett in his latest letter to shareholders. “But the U.S. Treasury bond bubble . . . may be regarded as almost equally extraordinary.”
Kenneth Rogoff, an economics professor at Harvard University and former chief economist of the International Monetary Fund, is in the same camp. Mr. Rogoff saysannual inflation could go as high as 8% to 10% within three to five years in the U.S., and sooner in the U.K. That can have a big impact on bond prices. If, for example, investors expected U.S. inflation to rise to 8% to 10% a year, the price of the 10-year U.S. Treasury bond would have to be about 25% lower than it is now.
“Government bonds may be the last bubble that is developing, says legendary hedge fund investor Jim Rogers. “I plan to sell short US government long bonds sometime in the foreseeable future I don’t know when, whether it’s this quarter or this year.”
There are naysayers. For example,one commentator, Mark Sadowski, says: “The risk of a bond bubble is much overdone. It is instructive to see what happened toJapanese government bonds….”