Investors bailed out of American bond funds in June. There was a net redemption in bond funds of at least $80 billion, late May to late June.
The trigger was the statement of Federal Reserve Chairman Ben Bernanke on May 22 that the FED might stop buying Treasury bands later this year. That spooked investors. Treasury bond rates rose. Investors started heading toward the exits.
Other FED spokesmen rushed to say that Bernanke did not mean what he clearly said. These FED officials blamed the media of a misinterpretation of Bernanke’s clear remarks.
Here was the explanation for the sell-off on CNBC.
The global sell-off in bonds began on May 22, after the minutes of the Fed’s policy meeting signaled that its bond-buying program—which has suppressed yields and boosted stocks—could soon be pared back. Fed Chairman Ben Bernanke echoed that view at a press meeting last Wednesday, suggesting that asset purchases could be scaled back later this year if economic data continued to show improvement.
I have no doubt that this was in fact the cause.
One firm that analyzes market movements is TrimTabs. It called the sell-off “unprecedented.”
“Until last month, investors had been content to shovel huge sums into bonds with little regard for value, confident that endless central bank liquidity would keep prices at ridiculous levels. It was only a few weeks ago that junk bond yields dipped below 5 percent for the first time.”
Mortgage rates have soared. The days of the 3.5% 30-year mortgage are over.
The bond market has been rigged by the FED. Everyone knows this. A handful of economists decide what rates should be. Investors went along with this. But Bernanke’s remarks persuaded them that the rigging will be reduced. So, they started selling their fixed-rate securities.
This is what happens when the decisions of a handful of salaried economists to inflate the currency are substituted for the decisions of investors. The economists giveth, and then their #1 spokesman threatens to taketh away. Investors then scramble for the exits.
We live in a world of government-rigged capital markets. We should expect more of the same.