The biggest risk factor in the stock market? It may be bonds!

I seem to be constantly hearing about the growing illiquidity in the debt markets;

illiquidity that has been attributed, at least in part, to the new capital requirements on

bond dealers. This growing illiquidity has been dramatically underscored by the

incredible short-term volatility in Treasuries of late. Someday, interest rates are going

to go back up to more normal levels (a process which may have already begun); when

they do, bond prices will, of course, go down. When they do, owners of bonds,

including many hedge funds with highly-leveraged positions, will be confronted with

increasingly-losing positions. If they try to reduce exposure all at once it may

overwhelm the now-much less liquid bond dealers – meaning that they would have to

sell what they can sell rather than what they would like to sell. (And if the process

ultimately leads to margin calls…)

What would be the easiest thing for them to sell under that scenario? Stocks.

Which is why I don’t think it is far-fetched at all to suggest that the biggest risk factor in the stock market here just may be bonds.

David Fuller's view

Here is Walter Deemer's Report.

This is certainly possible, in addition to funds with both bonds and stocks selling some of the latter just because they are worried about the potential for rapidly rising bond yields.

I think the US 35-year plus bull market in US bonds is over, although we do not have conclusive evidence of this at present.  If so, the next bond bear market is commencing.  Most markets are in for some further choppy action over the lengthy medium term.  However, quality stocks trading on reasonable valuations and with well covered dividends remain far more attractive than bonds, in my opinion.