See the Latest Market Blowup, This Time in Bonds? Get Ready for More Moves Like It!

Did you see the latest market blowup we just had? No, not in stocks. In government BONDS!

The yield on the 10-year Treasury note shot up to 2.97% from 2.85% last Friday and Monday. Meanwhile, the price of U.S. Treasury bond futures tanked more than two-and-a-half points. Things were even worse in Japan, where government bond yields shot up the most in almost two years.

Stocks didn’t budge much as bonds were smacked around. But six months ago, it was stocks that got rocked. The Dow Industrials plunged more than 1,000 points in a single day ... twice ... and ultimately shed more than 3,200 points.

The volatility market went ballistic in February, too. Following a record-breaking streak of all-time lows and extreme stability, the CBOE Volatility Index soared from around 10 to more than 50 in just a few days. That was the highest intraday reading since China’s surprise yuan devaluation in August 2015.

Three different markets. Three different tantrums. But they all stem from the same underlying, driving force — and that force is only getting more powerful with time!

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Just go back to what I wrote in May: Central banks the world over are slowly but surely turning off the flood of excess liquidity into markets. They’re raising interest rates. They’re dialing back Quantitative Easing, or QE, programs in which they bought trillions of dollars in bonds and stocks. The process even has a nickname: “Quantitative Tightening,” or QT.

The latest bond market tremors were fueled by media “trial balloons” out of Japan about that country’s central bank dialing back its stimulus.

Bank of Japan policymakers hold their next meeting on July 30-31, and there’s speculation they might adjust course.

Why is that such a big deal? Enough to set off the worst yield surge since 2016?

Source: Bank of Japan, Public Domain

Because the BOJ has Hoovered up so many Japanese government bonds that it owns almost half the entire market!

This has crowded out many of the private pension funds, money managers and others who would normally be in there, actively buying and selling.

In fact, there were six times this year when not one single Japanese 10-year bond changed hands in the regular trading session.

That’s like if the NYSE opened, and everyone just decided to play Fortnite on their phones all day!

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Japan hasn’t just destroyed liquidity and private market price discovery in bonds though. It has also been actively buying more than $54 billion a year in STOCK ETFs. Result: The BOJ is now one of the top 10 shareholders in around 40% of the publicly traded companies in Japan, with a total portfolio of more than $227 billion.

Bottom line: Regardless of exactly WHAT kind of QT the BOJ does or WHEN it does it, it’s going to roil the markets. And the BOJ isn’t alone. The U.S. Federal Reserve is well along the QT path, having already shrunk its balance sheet by more than $220 billion from peak levels. Plus, the European Central Bank said it would slash its QE program in half in October, then eliminate it altogether in December.

No one can say for certain how much of the explosive rally in assets of all kinds since 2009 was “real” vs. central-bank-driven “fluff.” I certainly have my opinions, which I’ve shared with subscribers and readers like you. And I continue to give my Safe Money subscribers investments that are set to thrive in exactly these kinds of conditions. Learn more about our approach here.

But it’s 100% clear to me that, as QT intensifies, we’ll see more tumult, more volatility and more market chaos. Just like the kind we’ve already seen three times in three different markets in just the first seven months of 2018.

This is exactly why I continue to recommend holding a higher percentage of cash in your portfolio and hedging against downside risk with tools like inverse ETFs.

It’s also why you should stick with only the highest-quality, fundamentally strongest stocks as identified by our time-tested Weiss Ratings system. Click here to see how we do exactly that for our subscribers.

Until next time,

Mike Larson