Not only is a bond market crash inevitable, but it will hit sooner than many think - by 2015 or 2016 at the latest, according to Michael Pento, president of Pento Portfolio Strategies.
"It's the most overpriced, over-owned, oversupplied market in the history of American economics," Pento said of the bond market in an interview with The Street.
Pento compared the current bond market, with its historically low interest rates and flood of U.S. Treasuries, to two of the most recent bubbles - the dot-com bubble of the late 1990s and the housing bubble that burst in 2007.
A sudden bond market collapse isn't likely, Pento said, but his models tell him it will happen, one way or another, within the next three years. And investors will need to be prepared.Why We Can't Avoid a Bond Market Collapse
Pento, who has a new book out called "The Coming Bond Market Collapse," said one only needs to look at the key factors that marked previous bubbles to see that bonds share all of the same dangerous characteristics.
"Let's look at overpriced," Pento said. "Bond yields are 550 basis points below the 40-year average."
And there's little doubt that bonds are overowned.
"Everybody knows how much bond inflows have been since the Great Recession began," Pento told The Daily Ticker. "Everybody's been piling hundreds of billions of dollars every year into bond funds."
Finally, Pento notes how drastically oversupplied the bond market has become.
"The U.S. government has amassed $7 trillion in publicly traded debt since the Great Recession began," he said. "That's an increase of 140%. If that's not the perfect definition of a bubble, then I don't know what is."
Given that conditions are ripe for a bond market crash, what will push it over the edge?
One possibility is that the U.S. Federal Reserve could start to unwind its $4 trillion balance sheet because it felt its stimulus finally had jump-started the U.S. economy, but Pento considers this unlikely.
For one thing, the U.S. economy has shown only weak signs of recovery. What's more, the Ben Bernanke-led Fed has demonstrated a bias toward continued easing and great caution toward reversing course.
Instead, Pento sees a different scenario unfolding.
"Much more likely to happen in 2015-2016 is that our creditors say, "Enough. You have over $20 trillion of debt, deficits that are running over $1 trillion for the last seven years, you have zero percent interest rates for seven years. I know - I'm very confident - that it's impossible for the U.S. to ever pay me back in real terms, and I demand a higher interest rate.' It'll be the same thing that happened in Greece," he said.How to Prepare for a Bond Market Crash
Pento suggested the federal government take steps now to mitigate the impact of a bond market crash, such as ending quantitative easing immediately and adopting a balanced budget amendment.
But few expect the government, which has created the problem, to do much about fixing it. That means investors need to start looking at what they can do to minimize the damage of a bond market crash to their portfolios.
Most obviously, investors need to avoid buying bonds or bond funds. But more importantly, investors need to find places to put their capital where it can work for them.
Money Morning Capital Wave Strategist Shah Gilani agrees that "the bond market is exhausted" and said that over time money will gradually move out of bonds and into equities as investors seek higher returns.
But Gilani has also designed some very creative strategies for actually profiting from a bond market crash.
Just go here if you'd like to know more about this strategy and Gilani's Capital Wave service.
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