Playing the Coming Bond Market Crash – Seeking Alpha

Since last November, the U.S. Federal Reserve has been buying U.S. Treasury bonds at a rate of about $75 billion a month. That’s part of Fed Chairman Ben S. Bernanke’s “QE2” program, under which the central bank was to buy $600 billion of the government bonds.

But QE2 ended Thursday, meaning the Fed will no longer be a big buyer of Treasury bonds. So starting today, the U.S. Treasury needs to sell twice as many Treasury bonds to end investors as it had been.

The problem is, who’s going to buy them? Not China, which is diversifying its trillions in assets to get as far away from the U.S. dollar as fast as it can. Not Japan, which is trying to rebound from its March 11 earthquake, tsunami and nuclear disaster — and is focusing all its spending on reconstruction. And, as we’ve seen, neither is the Bernanke-led Fed.

I’m telling you right now: We are headed for an epic bond market crash. If you don’t know about it, or don’t care, you could get clobbered. But if you do know, and are willing to take steps now, you can easily protect yourself and even turn a nice profit in the process.

A Timetable for the Coming Crash

I’m an old bond-market hand — my experience dates back to my days at the British merchant bank Hill Samuel in the 1970s — so I see all the signs of what’s to come. Having the two biggest external customers of U.S. debt largely out of the market is a huge problem.

Unfortunately, those aren’t the only challenges the market faces. The challenges just get bigger from there, which is why I’m predicting a bond market crash.

Steadily rising inflation is one of the challenges. Inflation is a huge threat to the bond markets, and is almost certain to create a whipping turbulence that will ultimately infect the stocks markets, too. Many pundits will tell you that if investor demand for bonds declines, and investor fear of inflation increases, bond-market yields could increase in an orderly fashion.

But I can tell you that the bond markets don’t work like that. Price declines affect existing bonds as well as new ones, so the value of every investor’s bond holdings declines. And with many of those investors heavily leveraged — especially at the major international banks — the sight of year-end bonuses disappearing down the Swanee River as bonds are “marked to market” will cause a panic. That’s especially true when end-of-quarter or end-of-year reporting periods loom.

That’s why we can expect a bond market crash at some point. If you ask me to make a prediction, I’d say that September or December were the most likely months for such a crash.

Click the link below to find out how to profit from the coming crash…..hint it is shiny, metal, and comes in “gold” and “silver” colors…..

via Playing the Coming Bond Market Crash – Seeking Alpha.