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Bond-Fires of the Vanities

Bond-Fires of the Vanities, 

The US Government plan to save the Bond Market, 

Many of you may remember the 1987 Tom Wolfe book that became the 1990 movie “Bonfires of the Vanities”. The story is about a Wall Street hotshot who watches as his high-flying lifestyle goes down in flames. The origin goes back to Florence, Italy, 1497, when the spiritual and political leading Priest Girolamo Savonarola rallied the populace to rid themselves of their worldly luxuries (the Vanities) into a huge pyramid shaped bonfire.

The Bond market is going to crash and burn!

As this is happening the US Government (with most other governments) will attempt to snuff out this huge Bond-Fire. The Federal Reserve announced they will start buying Exchange Traded Funds immediately. The Fed is specifically targeting ETFs that own US corporate bonds. The key is bailing out the soon to be bankrupt companies that depend on bonds to fund their business.

Bonds are debt instruments. They are issued by companies, municipalities, states, and sovereign governments to finance projects and operations. They are securitized as tradeable assets. Bonds are traditionally paid at a fixed interest rate to holders of the bond. Bond prices are inversely correlated with interest rates. When rates go up, bond prices fall and vice-versa. Bonds have maturity dates as to when the principal amount must be paid back in full or risk default.

Exchange Traded Funds (EFTs) are a basket of securities that trade on an exchange. ETF share prices fluctuate all day as the ETF is bought and sold. ETFs can contain all types of investments including stocks, commodities, or bonds. Some offer U.S. only holdings, while others are international. Bond EFTs could include government bonds, corporate bonds, municipal bonds and sovereign bonds. The US Governments buying is focused on EFTs that hold US corporate bonds and debt.

The total US National Debt surpassed $25 trillion on May 5. At 117% it is the highest percentage of US Gross Domestic Product since the end of World War II. We are at the beginning of economic devastation caused by the response to the World War on Covid-19. We will soon see this debt increase to $30 trillion.

Clearly, the Federal Reserve Bank will print and digitally create money out of thin air, and then use that new money to buy ETFs. The plan for the Fed is to try to bail out bankrupt companies across America. This is in addition to any direct industry bailouts. Normally, many medium and large businesses help fund their companies by issuing corporate bond debt. They use the principal and make the interest payments to the bond holders. When the bond matures, they sell the bonds over again so as not to pay the principal and are back to just paying the interest. Even strong profitable businesses regularly issue bonds accumulating debt with little risk in normal times. Bond holders repurchase for the fixed interest received on a regular basis. This enables them to safely keep their money earning a predictable return.

This has worked smoothly for decades. Companies all over the world do this, and the global bond market is absolutely enormous. So much so, that the global stock market is worth about $75 trillion with the US having about 45%. That is a huge amount. You probably didn’t realize that the global bond market is about $110 trillion with the US having about a 42% share. Yes, the bond market is larger than stocks although the stock markets get much more press. Disruption to the bond market is a silent killer.

What if bond buyers disappear? And they will! Bond holders are now seeing that companies big and small will not make it through this economic crisis. They will soon have trouble paying the interest much less paying their owed principle. This will be come a game of musical chairs and no one wants to be left holding defaulted bonds.

Airlines, hotels, restaurant chains, shopping malls, movie theaters, factories, cruise lines, shipping companies, retail stores, daycare facilities, schools, construction companies, and more will be unable to survive without the bond market. Most of these companies have been regularly financing their business through bond debt. As their revenue dries up, there will be a tsunami of defaults in the corporate bond market.

As an example, American Airlines has $21 billion of debt. Would you buy their bonds today? The chance is zero that American Airlines will have the ability to make interest payments. This will trigger defaults throughout their vendors. Thousands of companies are in this position and won’t be able to make their interest payments. The problem is even bigger as bonds mature and the principal needs to be paid back.

In normal times these bonds are regularly rolled over and the principal is moved out to a new term on this debt. This has worked smoothly and without interruption for as long as any of us have been alive.

It is not normal times. The bond market is paralyzed to its core. Few investors want to buy bonds. There are lots of companies with bonds. There are hundreds of billions, maybe trillions, of bonds that will be due to mature. Without any buyer’s there is no way to roll over these bonds and refinance this debt. There will be a wave of defaults of interest payments and principal. Bond investors who own those bonds will suffer major losses. This problem will cause a chain reaction throughout the financial system. When a company defaults on their bonds, the company is ruined. The fund that owns the bonds gets wiped out. Banks behind the funds take a huge hit. It’s a snowball running down hill growing bigger and faster every minute.

The Fed will be the only buyer, the buyer of last resort. The Fed has to buy the bond debt and it is already happening. The Fed is buying with the only tool they have, manufacturing money. They will use that money to buy corporate bonds and bond ETFs. Their plan is to assist companies to roll over their bond debt and prevent the snowballing of defaults within the financial system. If only 10% default it will likely be $4 trillion or more. That is on top of the $4 trillion of stimulus already spent with more coming for other areas of the economy. There is no way to know what the future effect will be - inflation, depression, stagflation, recession, etc.? We don’t know.

What we do know is that globally central banks will continue to print money as the only plan to hold economies together. This is neither right nor wrong. It doesn’t matter. It’s being done now and it is too late to change. This is because governments globally have to bail out everything and the cost is trillions of dollars.

Real estate is no longer a real asset opportunity. Physical assets such as gold and silver are the real asset opportunities for today. Precious metal assets historically increase in value when central banks print huge amounts of money. This money creation devalues their currencies. In the past, real assets have been safe havens.

We have all watched as the US went from the largest creditor nation to the largest debtor. I don’t believe that this pandemic is over. I see future waves coming back until there is a viable cure which is at best more than a year away. The response of the US population has been blind to this risk. This lack of concern will haunt them into the future.

The bond buyers are going to run away. Only the Fed is left to buy the bond debt. This is already happening. Bonds will be due. What will happen to the underfunded pensions and healthcare liabilities which hold these bonds? It is a Ponzi scheme and it doesn’t matter. The Bond-Fires of the Vanities are upon us and burning stronger every day…killing us softly.


Comments: (2)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 09 June, 2020, 16:401 like 1 like

“Bonfires of the Vanities" (book version) was my first exposure to how costly it can be to miss an exit on a US freeway and end up in Bronx! But the Bondfire situation portrayed by you seems to be infinitely scarier:(

Chris Principe
Chris Principe - APB, Inc. - Miami 10 June, 2020, 18:34Be the first to give this comment the thumbs up 0 likes

Thank you for your comment. Being born, raised and lived in Manhattan for decades. I understand what a inadvertent side trip to the bronx can be. This is more scarier.

Chris Principe

Chris Principe


APB, Inc.

Member since

15 Nov 2008



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