While I have not been as bearish on the world's largest economy as some others (Mr.Marc Faber, for example), I do see significant risk for global investors in holding on to US Treasury and US Corporate long maturity bonds.
In my view, they are no longer the safe-heaven people have learned them to be, in recent turbulent times. If I was running a large investment fund I would want to be short US bonds of longer maturities!
After immense wealth destruction in US equities the past few years, I see a similar destruction of wealth in the making in longer maturity bond prices. Bond market values are highly sensitive to interest rates and if these rise -market prices on long bonds will be market down considerably. The interest rate risk associated with bonds are generally not well understood by investors….and often not well enough explained by investment professionals, the world over.
The US housing market (also in a classic bubble, just like US bonds) could as well be negatively affected by a US rise in interest rates in year 2004 or 2005. While it is less clear how long high US housing prices are sustainable, they are far more leveraged then bonds or stocks. In US, I met more people in the Home refinancing business, then any other profession. The US housing market is highly leveraged because so many home owners have borrowed the maximum allowed; and this on ever increased appraised market values at historical low interest rates. While owning a home there gives meaningfully tax advantages and while people "must live somewhere", there now is an alert risk that US home prices will come crashing down in value when US interest rates inevitably rise at some point. To me, in general, US housing prices seem unsustainable just as US bond prices. I remember how individual Swiss Housing prices collapsed in the late 1980's, then just as now, the elite & educated told us it would never happen.
Noon, August 27, 2003
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