I spent my childhood discussing the stock market at the dinner table. My dad was a stock broker, and he loved to “tell the story” of the stocks he recommended to the customers – a story that included critical information about macro economics, the industry, the products, earnings, and the outlook for the future. Most children might find it dull, but I liked it.

As I got older and debated with friends about investing, I’d light up when the topic was stocks. Who in the world wouldn’t get excited about financial analysis to decide which company could make you money! When the conversation turned to bonds, however, I would shut down. Bonds? How dull; how utterly boring. There’s no story to tell, no industry trends to follow. I saw bonds as an interest check every six months, then a return of principal when they mature. I thought bonds were boring.

Over the past few years, I’ve read many articles about investors getting out of the stock market in favor of bonds. I understood the reasons for getting out of the stock market, but the thought of moving into bonds baffled me. Interest rates were very low, and I knew that when the rates started going up, bond prices would go down; a simple inverse relationship. I started investing in the mid-80s, when rates were at the highest point of the past 50 years — who would buy bonds now, when yields are at the lowest levels in half a century? There’s no place for your principal to go but down, I thought.

So I went back and talked with my friends some more, to see if there was something I was missing with these “boring investments.”

Turned out, my friends had moved their nest egg into bonds after they lost over 30% of their money in stocks during the crash of 2008. They told me that bonds had gone up in value. I was surprised.

So I started looking into it. They were right! I thought bond yields could go no lower than they were two years ago, yet they did, In turn, that brought the prices – i.e., the principal on their investment – up!

I asked what kind of bonds they got into. “High-yield bond funds” they said. What kind of bonds are these funds invested in? To this question I got blank stares. How long do you plan on staying in these funds? This got the reply I was afraid I’d hear: “Why would we get out when they are so much safer than stocks?” That’s when my new interest in these once boring investments turned into fear – for my friends.

First of all, the simple idea that a rise in interest rates would cause their principal to fall worried me. But my greater fear was that they did not even know what types of bonds they were invested in!

Elliott Wave International’s president Robert Prechter has followed this new investment trend closely in his monthly Elliott Wave Theorist. This quote is from the October 2010 issue:

• A fifth consecutive major disaster is developing for investors. History shows that investors have been attracted like moths to a flame: the NASDAQ in 2000, real estate in 2006, the blue chips in 2007 and commodities in 2008. Now they are flitting across the veranda to a mesmerizing blue flame: high yield bonds.
• Bonds pay high yields when the issuers are in deep trouble and cannot otherwise attract investment capital. The public is chasing a large return on capital without considering return of it.

Discover why Prechter says that, “The public always does the wrong thing.” Access this free online report now.

You can learn more about what Prechter’s market analysis says for bond investors now – for free. We’ve recently released a 10-page report, “The Next Major Disaster Developing for Bond Holders” free to members of Club EWI.

The Muni Bond Crisis Is Here – Crash has started

Elliott wave subscribers were prepared for municipal bonds troubles months in advance
November 24, 2010

By Elliott Wave International

This November, the whole world tuned in as the greater part of the U.S.A.’s 50 states turned red — and no, I don’t mean the political shift to a republican majority during the November 2 mid-term elections. I mean “in the red” — as in, financially fercockt, overdrawn, up to their eyeballs in debt.

Here are the latest stats: California, Florida, Illinois, and New Jersey now suffer “Greek-like deficits,” alongside draconian budget cuts, job furloughs, suspensions of city services, and the growing “rent-a-cop” trend of firing city workers and then hiring outside contractors to fill those positions.

Next is the fact that the municipal bond market has been melting like a snow cone in the Sahara desert. According to recent data, 35 muni bond issues totaling $1.5 billion have defaulted since January 2010, three times the average annualized rate going back to 1983. Also, in the week ending November 19, investors withdrew a record $3.1 billion from mutual and exchange-traded funds specializing in municipal debt, triggering the largest one-day rise in yields since the panic of ’08.

In the words of a recent LA Times article “It’s a cold, cold world in the municipal bond market right now.”

And for those who never saw the muni bond crisis coming, it’s a lot colder.

Since at least 2008, the mainstream experts extolled munis for their “safe haven resistance to recession.” And while muni bond woes are only now making headlines, one of the few sources that foresaw the depth and degree of the crisis coming ahead of time was Elliott Wave International’s team of analysts. Here’s an excerpt from the April 2008 Elliott Wave Financial Forecast (EWFF):

“One of the most vulnerable sectors of the debt markets is the municipal bond market. Instead of being a source of state and local funding, many residents will become a cost. Default could hit at any moment after times get difficult… Yields on tax-exempt municipal bonds are above yields on US Treasuries for the first time in as long as anyone can remember, another sign of how limited the supply of quality bonds will become.”

EWI continued to warn subscribers ever since:

• February 2009 EWFF: Special section “Out of the Frying Pan and into Munis” showed the continued rise in muni yields ABOVE Treasury yields and cautioned against the idea that tax-exempt debt was a “safe bet.”
• September 2010 Elliott Wave Theorist: “The Next Disaster: The public has withdrawn some money from stock mutual funds… But most investors … are shunning treasuries for high-yield money market funds and bond funds, which hold less-than-pristine corporate and municipal debt.”

And now, in the just-published November 19 Elliott Wave Theorist, EWI president Robert Prechter captures the full extent of the unfolding muni crisis via the following price chart:

Read more about Robert Prechter’s warnings for holders of municipals and other bonds in his free report: The Next Major Disaster Developing for Bond Holders. Access your 10-page free report now.

This article was syndicated by Elliott Wave International and was originally published under the headline United STRAITS of America: The Muni Bond Crisis Is Here. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Individual Investors Have Jumped Into Another Fire

December 18, 2009

By Robert Prechter, CMT

The following article is an excerpt from Robert Prechter’s Elliott Wave Theorist.

First they bought into the “stocks for the long run” case and got killed. Then they jumped on the commodity bandwagon and got killed. Many investors are buying back into these very same markets, but others are running to what they perceive as safe “yields” in the municipal bond market. So far this year, individual investors have “poured a record $55 billion” (Bloomberg, 11/12) into muni bond funds, with the pace running $2b. per week in August and September; many other investors are buying munis outright. These must be the people who tell us that they can’t live without “yield” and also cannot imagine their city, county or state government going bust. But as Conquer the Crash warned and as The Elliott Wave Theorist has reiterated, the muni bond market is heading for disaster.

Municipalities have borrowed more than they can repay, they have pension liabilities that they cannot meet (up to a trillion dollars’ worth, according to Moody’s), and tax receipts are falling. The only reason that states haven’t failed yet is the so-called “stimulus package,” which took money from savers, investors and taxpayers—thereby impoverishing the people who live in the various states—and gave it to state governments to spend so they would not have to cease their profligate spending. But political pressures will eventually cut off this gravy train. In the 2010-2017 period, the muni bond market will become awash in defaults. The leap in optimism since March, which has shown up in every financial market, has fueled a retreat in muni bond yields to their lowest level since 1967 and narrowed the spread between muni bond yields and Treasuries.

This rush to buy municipal bonds is occurring right on the cusp of a dramatic decline in their values. While many individuals are loading up right at the peak so they can participate in the next major market disaster, smarter investors, such as insurance companies Allstate and Guardian Life, are getting out. Subscribers to our services, we trust, own not a single municipal IOU. Our recommendation for investors is 100 percent safety, and such a program does not include muni bonds. If you are a recent subscriber, please read the second half of Conquer the Crash as a manual on how to get your finances safe.

Get Your FREE 8-Lesson “Conquer the Crash Collection” Now! You’ll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more. Learn more and get your free 8 lessons here.

 

Robert Prechter, Chartered Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.