When I mentioned the other day dumping the TIP position in client portfolios, I said that I’d probably be wrong – but thankfully so far I wasn’t. Yields are moving higher and bonds are falling. Is this the big move many have been expecting? I’m not sure but you can’t ignore it.

On (or near) the Range

The real test is when bond yields bump up against Bernanke’s “range.” He hasn’t said anything about a range but he’s no dummy – he knows rising rates will sink the US into a debt spiral as the cost of reissuing maturing debt will grow, i.e. interest cost on debt will grow i.e. much more tax revenue paying interest. He doesn’t want to go down that road – so I think he has an upper level of rates where he plans to step in if they go that far.

And the market will test him on that “upper range” at some point. Then we will see who’s in charge – can Bernanke slap rates down with more long bond purchases, or will the market shun Treasuries due to inflation fears leaving rates to rise further?

Bottom line – when Bernanke loses control of the bond market (some people think this is a ‘

“If Bernankes loses…” question – I prefer to use “when”), all hell is gonna break loose.

It Will Come “Suddenly”

As I have mentioned many times in various blog posts over the past 3 years, moves in this market happen fast and “suddenly” to the casual observer. Meaning, like the mortgage market, with signs for over 2 years of problems, the average person didn’t care until the 4th quarter of 2008 when the pain hit its peak.

The average person has no idea about this bond/rate problem: what one hedge fund manager calls the potential “funding crisis” – when Bernanke is trapped as he tries to solve problems with more printing and bond buying and it just doesn’t work; but he keeps trying, blowing up the problem by sending rates much higher, the dollar much lower, while government debt interest expenses explode.

Note: If the debt is projected to hit 20T in 2014, and interest costs rise to 5%, that’s ONE TRILLION DOLLARS PER YEAR IN INTEREST PAYMENTS ALONE. HELLO.

Be careful out there…

At the time of this writing, I or my clients own the following investments mentioned in this column: NONE

Note: this article is meant to be some helpful thoughts to share and not investment advice specific to you. Please consult your own advisor regarding investment and financial decisions. See ourĀ disclosures page