What does a Bond Collapse Mean to Investors?

The longest con in sports history took place from 1954 to 1972 (19 years).

On one side of the con was a self-taught brilliant loner raised by a single working-class mother in Brooklyn, New York and on the other side was the most dominate government on the planet, the Soviet Union.

If there ever were a David and Goliath story in sports, it’s this one.

The brilliant loner conned the Russian and beat them at their most prized sport.

The final score, 12½ to 8½.

You’ve got to understand this loner was completely self-taught and a recluse. No coaches, no trainers, no advisers, no funders… no nothing. Just him.

The Goliath was the Soviet Union with an unlimited budget, set of resources and literally forty of the top 45 players in the world having already dominated the sport for 24 straight years.  

The sport in question was Chess and the “David” was Bobby Fischer on one side of the con and Boris Spassky backed by the full force of Soviet Union Chess industrial complex, on the other side.

Below is Spassky on the left and Fischer on the right in Iceland in 1972.

bobby Fischer playing chess

In the 1950’s, 60’s and 70’s Chess was the way the Soviets demonstrated their intellectual superiority over the West. Yes, the West was more modern but not smarter.

Since 1948 no one came close to beating the Russians. 

The Russian’s didn’t dominate the sport of Chess, they owned it.

They were as Goliath as you could get in any sport, even today.

In the 40th move in the six game of the Chess World Championship in 1972 Boris Spassky suspended his play against Fischer and retired from Chess for ever. Fischer Won and…

fischer is king headline

…Goliath lost! 

The defeat was a crushing moment for the Russians during the Cold War.

So what happened? Or more apt, how could this have happened?

Simple, the Soviet Union expected Bobby Fischer to act like, Bobby Fisher.

When Bobby Fischer competed in the World Chess Championship in Reykjavik, Iceland in July of 1972 he did something the Russians didn’t expect.

And that’s where this story aligns with bond investors expectations today.

Tens of millions of people are going to potentially lose just as badly as the Russians did in 1972 because of misplaced expectations.   

You see most investors are expecting the stock market to be the source of great loss in the coming years.

But what if they’re wrong?

What if they are expecting financial loss from the wrong player?  

What if the source of their future loss is in fact the very place they have been taught to believe they are the safest?

What if a bond collapse is coming?

When most people hear the word “bond” in the context of investing, most have feelings of safety, steadiness, stability, and guaranteed-ness.


To most, “bond” means safe.

That’s why older people (read: over 60) have bonds while 30-year olds don’t.

Bonds are safe. Right?

And when investors age, they need safe investments with guaranteed-ness.

Here’s what’s worrying me.

First, 50% of all investment advisers started their careers after the 2009 Global Financial Crises. So, they have never experienced a major decline in any asset class. Let alone a collapse in the bond market.

Second, every (okay, I know it can’t literally be everyone but it’s very close) adviser has been advising their clients in an era of rising bond prices only. Bond prices bottomed in 1981 and have been trending higher ever since.

Thats 37 years of bond prices only going higher.

So since 1981 the sun has always set in the West and risen in the East. Every time. That’s bonds to most people. Bonds are as safe as the sun rising in the East.

Most people have never invested in an environment where bonds were not in a long-term bull market. That includes everyone that’s been investing since 1981.

Most people have never invested in an environment where bonds are the source of loss and pain.

Most have never lived in a world where the sun rises in the West and sets in the East.

But what if the bond bull market is not only over but is moving quickly towards a collapse?

What if the source of predictableness (read: bonds are safe) will be the exact place that volatility reigns?

What if the investor’s “safe” becomes their “dangerous?”

No, the sky is not falling. No, the world will not end. No, I’m not calling for the imminent collapse of the bond market this week.

I’m posing a very important question.

What if bonds are not safe anymore?

The most followed bond on the planet is the 10yr US Treasury Bond. Below is a price chart of it. The red section at the top of the price chart is highlighting the downward trend of the last six years.

Notice anything?

10 year us bond

Here’s the worry.

The Fed has started selling their hoard of bonds and they will increase their monthly sales amount to $50 billion a month by the end of 2018.

Just so we are clear.

The Federal Reserve is the largest holder of US bonds. What happens when the largest holder stops buying (already happened) and starts selling (already happening)?

This is the question advisers must be asking themselves. And if you are managing your own money they you are your advisers.

These are the type of questions that must be asked. These are not “nice” questions to ask. They are “must” questions to ask.

The Russians didn’t ask the right questions.

And because of that, one brilliant loner wiped out [almost] a quarter century of domination. How? He defied expectations.

What if bonds defy expectations?

Who’s asking these questions for your money?

the biggest holder

A total of about $650 billion worth of bonds could roll off the balance sheet of the Fed in 2018 alone.

And as you can see in the image below, the FED “increased their balance sheet” (read: printed money) from 2008 to 2015.

What’s most interesting to me is not that the stock market went up during that time period but that the 10 yr US Treasury stopped going up in June 2012.

Let me say that again.

The price of the 10 yr US Bond STOPPED going higher

Even while the Fed was buying more bonds. That matters more than noticing the stock market went up for eight years.

Do you get it?

Even if bonds don’t collapse (I know that word is a bit fear-based, but I want to make a point) but just slowly decline for the next 30 years, what’s your plan?

fed balance sheet

Now, I want to be clear. I don’t know what is going to happen to the bond market in the near term.

But if anyone would, it would be these two guys. Two guys that have gotten the bond market right more than anyone else over the past thirty years.

And they have both called the top in the bond market separately. Are they right? We’ll know for sure after the next recession and bear market.

This week’s thoughts are not about whether the bond market has peaked. It’s about what happens to an investors future if their expectations are completely wrong. It’s about not asking the right questions.

What if the collapse happens in bonds?

You want to know why the Russian lost?

They lost because up to July 1972, Bobby Fischer had ALWAYS played the exact same way. Every game he played in the previous 19 years was played with the same opening moves. The same strategies. And the same thought process.

The Russian Chess Industrial Complex literally had dozens of Grandmasters studying the moves of every one of Fischer’s game that he had ever played.

The expectation was that Fischer was going to play like Fischer had always played.

But Fischer didn’t. He played a different game. And he crushed an empire.

And Goliath lost.

The Bond Market is Changing (Changed?)

And I believe the bond market is starting to play a different game. And yet very few investors and advisers are paying attention.

Are advisers getting conned by bonds? And are advisers therefore conning their clients?

  • In the 2008-2009 Global Financial Crises when stock markets around the world fell by 50% to 70%, Bonds jumped 57% higher in price.
  • In 2011 when the stock market fell by 20%, bond prices popped 35% to the upside.
  • In 2015 and 2016 when the market fell 13% twice, bonds priced moved higher 27%.
  • But in the stock market’s most recent 10% decline over nine short trading days bonds didn’t “pop.” They fell 6%.

What if investors and advisors expectations of how bonds are suppose to act are as misplaced as the Russians were about Fischer?

What if safe wasn’t a fixed asset anymore but a way of acting or thinking? What if the safest thing an investor or advisor could do was question all expectations.

In Your Corner,

RCPeck-Dig Signature.JPG     
RC Peck, CFP

P.S. If you’re concerned about whether or not your money is safe or ready if we did have a bond collapse then we should talk.  




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