Bond traders gave us a distressing warning

The bond traders market's forecast for inflation in the next five-year period hit a new high last week. This is because bonds are known for being highly accurate in predicting macroeconomic trends.

Bond traders see inflation at just below 3% in the next five years - higher than what they have been ever forecasted. When the bond market speaks, I listen, as this covers everything from recessions to the Federal Reserve's next move, wars, government policies, or inflation.

This is why it's an excellent way to predict future inflation levels by looking at the bond market to see what the bonds think inflation will look like in the future.

Right now, the inflation fears of bond traders are more significant than ever in the past two decades. What's the lesson for investors from this inflation data?. 

Regular readers will know that the global economy is currently in the final stages of its most massive credit binge ever recorded. Credit has never been more accessible or cheaper, and the world has never been as leveraged.

This weekend's news revealed that junk-rated creditors owe over $1.5 trillion based on the face value of junk bonds issued -  This is more than they have ever owned.

If central planners allow interest rates to rise, it will cause a global economic collapse. In other words, this is inflation mixed with stagnation.

However, if they do not allow interest rates to rise, the prices of everyday goods will continue snowballing. Investors will soon flee the bond markets, leading to what we call "synchronized global currency appreciation."

Bond traders distressed market signals

As I have already mentioned, bond traders' inflation forecasts for the next five years showed with hitting new heights on Friday.

This is called the breakeven inflation rate. This can be described as the interest rate measured by the difference or spread between pair bond yields.

It's not just five-year inflation predictions that are hitting new heights. Breakevens for Thirty-year and Ten-year terms also hit multi-year records. There was also much selling for a short-term bond, especially in Australia, New Zealand, and Canada.

The worst sell-off since 1996 occurred in Australia's market. Canada suffered the most severe decline since 2009. Last week saw bond yields in Spain, Portugal, Italy, and Greece all rise.

From the Financial Times:

''Short-term bond markets have ‘experienced unprecedented volatility this week, said George Saravelos, Deutsche Bank’s global head of currency research.'' 

''Saravelos said the moves had been exacerbated by investors being forced to abandon soured bets as markets move against them. ‘What is happening now runs beyond macro,’ he said… ‘This is the closest we can get to a distressed market.''

What does all this mean?

It appears that the central planners have lost control of short-term interest rate policy. Either they will have to increase money printing to bring down bond yields, or things will start to be blown up into the stratosphere.

Our best option is to avoid bonds while we wait for the financial system to stabilize. However, we are still bullish on gold and silver, and deep-value infrastructure plays like shipping stocks.

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