The US bond market was closed yesterday for Columbus Day, while US stocks enjoyed their biggest rally since the stock market crash in 1929. That ought to be enough to caution anybody who thinks the problems are over in capital markets - after the 1929 rally markets lurched lower for several years. However, the record equity rally is not going to be good news for the bond market as it returns from holiday. As noted on this blog yesterday the US bond market has formed a double top in its charts and is dangerously overbought. It is another bubble set to crash. Bond crisis With equity prices up an equally massive sell off in the bond market is therefore about to happen, precipitating another crisis. How will governments fund their massive bank bailouts if the bond market ceases to function? For when investors suffer huge losses on bonds today they are hardly likely to want to buy new government debt, unless it carries a much higher coupon payment. That means interest rates will have to go up at a time when the world is facing a recession, probably its worst in a generation or two. That will make the recession deeper and longer. Legendary investor Jim Rogers has been shorting US treasuries and some hedge fund managers will have had the same insight. But all those investors who have been shifting from equities to bonds are about to get caught out. How many will be able to switch instantly back to equities? Double whammy I am afraid that will be a double-whammy for investors and yesterday’s rally in equities will prove a sucker’s rally as bond holders will sell at depressed prices and then have to cover their margin calls by selling equities again. This is a downward spiral. With bonds no longer a safe haven then only gold and silver will be left - expect a rally in precious metals of unbelievable proportions, and the dollar will also surge on safe haven buying and the interest rate outlook.

Source