Fleckenstein: We’re headed for a bond train wreck
As the world awaits minutes from the Federal Reserve Bank's Open Market Committee meeting, one fund manager says The Federal Reserve Bank has lost control of the bond market. And, he says one of the biggest assumptions the world markets have been making may be entirely wrong.
Over the past several years, the Fed has been purchasing US Treasury and mortgage bonds, most recently at a rate of $85 billion per month. The policy is known as "quantitative easing".
Towards the end of May, Fed Chairman Ben Bernanke hinted at a potential tapering of the program and that led to spike in bond yields. Bondholders sold off their bonds on the notion that the Fed may no longer be there to prop up prices. Lower bond prices mean higher yields and, on the US 10-year Treasury note, they've gone from 1.63% in May to the current 2.8%. That said, Bernanke has hinted that tapering is contingent on economic data.
Bill Fleckenstein, president of Fleckenstein Capital, is a well-known Fed watcher. He called the subprime crash in 2007 and, in an appearance on Talking Numbers back in early May, warned of impending trouble in Japan just one week before that market went into a tailspin.
Bill Fleckenstein, president of Fleckenstein Capital, says the Fed can no longer control the bond market but the markets aren't aware of that yet. In his most recent Talking Numbers interview, Fleckenstein says there will be one definite signal to the world that the Fed has lost control and that has to do with its ability to taper quantitative easing – if it can happen any time soon. And, Fleckenstein isn't so sure it can.
Fleckenstein also warns of "misplaced optimism" in the markets but, to hear why the markets may be missing something huge, watch Fleckenstein's provocative interview in the video above.