Long Bond Yield Rising: Problem times a coming

The "long bond" is the nickname for the 30-year Treasury bond.

Long-bond prices are plummeting right now. They have just broken down to new five-month lows... and the selling pressure is so strong, not even the Fed's printing press can hold prices up.

When the long bond falls in price, its interest rate rises... The long bond's yield was as low as 2.5% in December. It has now risen past 4%. This could be a huge problem for income investors.

The government is going broke... and to delay the inevitable, the Federal Reserve will likely start buying Treasuries. If the Federal Reserve steps in - which Marc Faber says is a certainty - it will add liquidity to the government bond market, keep yields low (allowing the government to continue funding worthless bailout projects), and eventually cause massive inflation.

"Yields have already backed up pretty substantially and I tell you, I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high," says Faber.
But there will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.

"So we'll go into high inflation rates one day," Faber said

The long bond competes with other income investments for investor capital. So a rise in the long bond's interest rate can crush certain income investments. Let me explain...

If the long bond's yield rises from 4% to 8%, the yield on all other income investments must also rise by 4%. A 12% junk bond would become a 16% junk bond. A 14% dividend payer would have to become an 18% dividend payer.

Here's the problem: For yields to rise that much, prices must fall – a lot.

So right now, as long-bond rates rise, buying income investments is a treacherous proposition.

The "junkiest" bonds and high-yield stocks will suffer the most from a long-bond bear market. Avoid risky income investments that use debt and financial engineering to pay large dividends. Stick with only the best-quality, high-cash-flow businesses that relentlessly raise their dividends.