The ​Post-Election Crash of Bonds Increases Risk for the Crash of Stocks

Michael Markowski  |

From Wednesday November 9th the day after the election of Donald Trump through Monday November 14th the U.S. Treasury bond market crashed. On November 9, 2016, the 10 year and 30 year U.S. Treasury Bonds experienced their steepest one day declines since 2011. The bid to cover ratio for the auction of the 10 year Treasury bonds on November 9th was the lowest since 2009 indicating very weak demand. Rates for the 10 year bond closed at 2.08% versus their all-time low of 1.35% in June 2016. See “Asian Shares Jump With Metals as Trump Reassessed; Bonds Plunge”, Bloomberg November 9, 2016. The rout has continued for three consecutive days with the 10 year bonds closing at a yield of 2.26 on November 14, 2016. The 2016 year to date chart for the 20 Year Treasury bond ETF (TLT) below depicts that the ETF is now just above its January 2016 low.

Based on the TLT’s and the entire bond market’s further declines on the Monday November 14, 2016 to December 2015 lows and assuming that the prices of the bonds do not recover or they continue to decline my conclusion is that three of the five bubbles that I discovered and which were the subjects of my October 16, 2016, article “Five Super Bubbles Increase Market’s Vulnerability to a Crash” have begun to burst. Below are the descriptions for three of the five super bubbles that I had identified which were related to the both the bond and stock markets having the potential to crash:

Super Bubble 1: Bonds and Stocks reach all-time highs simultaneously

During the summer of 2016 the U.S. Treasury bond and stock markets for the first time throughout the history of the markets simultaneously reached new highs together. The 30 year U.S. Treasuries reached their all-time high on Friday July 8, 2016. On the same day the S&P 500 reached a 52 week high. The next business day, Monday July 11, 2016, the S&P recorded its new all-time high. The coordinates for the charts below are from the TLT and the S&P 500.

Super Bubble 2: Historical inverse relationship between stocks and bonds broken

The inverse high and low price relationship that the stock and bond markets have had throughout the history of the markets that is depicted by up and down arrows in the above chart no longer exists. Since the advent of negative interest rates for first time ever in 2014, the long term trends for both stocks and bonds has been parallel and up, also a historical first.

The magnified area on the chart below depicts that bonds and stocks were trading lock step from April through October of 2016. The up and down trends for both stocks and bonds during the six months was eerily parallel.

With the historical inverse relationship between stocks and bonds disengaging the safety net for the stock market that has been in place for all market crashes from 1929 to 2008 in the chart below had been removed from April 2016 through October 2016. The chart below depicts that for each year the stock market produced losses the bond market had profits.

Super Bubble 3: S&P 500 dividend yield higher than bond yield for first time ever

In July 2016 the dividend yield of the S&P 500 for the first time throughout the history of the world exceeded the yield for the 30 year U.S. Treasury bond. There is no logic for a bond to have a lower yield than a stock since the bond’s interest payments are fixed while a stocks’ dividend can grow. This happening for the first time in my 40 years in the stock market indicates that primary metric being used by investors to value stocks is yield instead of profits.

The magnified area in the chart below depicts stocks diverging upward and the bonds downward for the first time since April 2016 indicates that three discovered bubbles are now bursting to cause the bond market crash. Further declines for the TLT and the bond market will further confirm this. With stocks now trading inverse to bond prices the trend of stocks and bonds trading parallel to each other since 2014 has been reversed. The yield of 2.85% for the 30 year U.S. Treasury bonds is now significantly above the S&P 500’s 2.1% dividend yield. It appears that the safety net for throughout the history of the market is now moving back into place.

The bursting of the three bubbles has resulted in bond prices tanking and yields spiking. Given the powerful reactionary forces that are now driving the bond market because of the election of Mr. Trump as President the probability is high that bond prices will continue to decline to multi-year lows with yields increasing until bonds make a bottom.

Because the age old inverse price relationship that stocks and bonds have had is now back in place further bond market price declines will result the relative valuations of or the spreads between bonds and stocks increasing. At some point the higher yielding bonds will spark profit taking or a sell-off of stocks. This could result in a significant correction or a crash of the stock market. The more precipitous the decline of the bond market the faster the timetable will be for the stock market correction or crash to commence.

After conducting the research which enabled the discovery of the five bubbles my conclusion was that it would inevitably be a spike up in bond yields that would trigger the crash of the stock market. After all, history has shown that significant spikes in yields and interest rates are the stock market’s worst enemy. Trump’s being elected was the catalyst that caused the bond market to begin its crash. It’s because the $500 billion U.S. debt offering that will be required for President elect Trump to fulfill his fiscal stimulus infrastructure campaign promise will force interest rates higher and bond prices significantly lower.

The bond market continuing on with its crash to lower prices and higher yields will be very negative for the U.S. economy for two reasons:

  • The 30 year residential mortgage rate is based on the 10 year bond’s yield. The 50% increase for the 10 year’s yield in less than five months will cause a spike in mortgage rates and reduce house prices. The prices of commercial real estate will also decrease since the higher rates will be reflected in the cap tables that are used to value commercial real estate. The decreasing prices of especially residential real estate and the resultant decline in construction activity increases the probability of a recession beginning as early as 2017.
  • The much higher yields makes bonds more attractive than stocks. The higher the bond yields go the more the probability that investors will make the switch by selling their lower yield dividend paying stocks to buy safer bonds. Declining stock prices would likely slow consumer spending which would also increase the probability of a recession beginning in 2017.

The spike up in U.S. yields is also negative for the global economy and especially for the economies of Europe and Japan. The Central banks of both Japan and Europe are utilizing massive monetary stimulus to maintain or lower interest rates. The much higher yielding U.S. bonds will motivate Japanese and European investors to sell their much lower yielding bond holdings to purchase U.S. bonds. This will result in the yields and interest rates in Japan and Europe increasing. As this unfolds the probability of a global recession beginning would increase.

The video below entitled “Crash! & 90/10 Crash Protection Strategy” contains additional research that I conducted on the crash. The video contains the only fail safe strategy that can be utilized to protect liquid assets from crashes and corrections that are caused by recessions.


The video below entitled “Five Bubbles putting market on verge of crash” is loaded with research and charts covering the additional information including the two bubbles that were not covered in this post. Some or all of the five bubbles or anomalies that I discovered could potentially cause a crash of the world’s stock and bond markets when they burst:


For an overview about me and access to links to the subjects that I cover, including the economy’s digital disruptors having the potential to multiply by 100 to 1,000 times, negative rates, perfect shorts, and micro-cap stocks please go to www.michaelmarkowski.net.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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