Investors Should Continue To Avoid These Vulnerable Sectors

ratesMike Larson: I’ve minced no words about my expectations for interest rates.

More than a year ago, in 2012, I said long-term bond prices would plunge and long-term rates would surge. They did. In fact, 2013 is shaping up to be one of the worst years ever for the bond market.

Then, earlier this year, I predicted a second leg to this move. I said that short-term yields would start rising. And they have — sharply.

What do I mean? Well, the government just auctioned a fresh round of 1-month Treasury bills — something it does frequently. But the auction was anything but normal.

The Treasury had to pay a whopping 0.35 percent in yield to borrow money for only 28 days. That’s a stunning 46 times the 0.0075 percent that 1-month bills were yielding only a month ago.

Not only that, but it was also the highest yield for a 1-month bill going all the way back to the fall of 2008. That’s when Lehman Brothers was in the process of going bankrupt and the credit markets were coming apart at the seams. Look at the following chart and you’ll see how this key indicator of market stress is surging.


Click for larger version

The immediate cause of this week’s interest rate dislocation was the latest bout of shenanigans in Washington. I laid out my thoughts about what to expect there last week. But suffice it to say, the closer we get to the debt-ceiling deadline, the more these concerns will ratchet up.

If a deal is reached, a portion of the move higher in short-term yields will likely ease. But the longer-term forces at work will not go away. The fact is, we are now on the cusp of a slow and steady unwinding of the massive, easy money-driven, Federal Reserve-fueled bond market bubble.

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