Peter Schiff Warns ‘Mother Of All Bond Bear Markets’ Is Coming — ‘Something’s Going To Break’

• The September jobs report delivered almost everything bond investors could have wanted, according to Schiff.
• He argued that a major deterioration in stocks could temporarily trigger a flight to safety and push investors back into Treasurys.
• But as long as the stock market continues to shrug off rising bond yields, he sees little reason for Treasury yields to reverse course.

Economist Peter Schiff warned investors Friday that the U.S. economy is heading toward a potential bond-market crisis, arguing that surging government debt, rising Treasury yields and persistent inflation could turn the current orderly selloff into a much sharper decline.

Schiff's warning came after Treasury bonds sold off despite a weak September jobs report, lower-than-expected inflation readings and sharply reduced expectations for an October Federal Reserve rate hike. He said the bond market's inability to rally on news that would normally support bonds is a sign that “the bears are still in control.”

“I think before the end of this month, something's going to happen. And something's going to break in the housing market,” he added.

Weak Economic Data Fails To Rescue Bonds

The September jobs report delivered almost everything bond investors could have wanted, according to Schiff. The U.S. economy added just 29,000 jobs in September, well below the 84,000 estimate. August payrolls were also revised lower, while the unemployment rate rose to 4.2%. Average hourly earnings increased just 0.1% month over month, the weakest monthly increase in more than five years, according to Schiff.

That combination initially pushed Treasury bonds higher and sharply reduced market expectations for an October rate hike, but the rally did not last.

Schiff pointed out that the 10-year Treasury yield ultimately closed the week near its highs at around 5.28%, while the 30-year yield ended around 5.63%.

“So despite getting everything that it wanted, the bond market went down anyway,” Schiff said. He described the move as “a classic bear market action”, arguing that investors are selling Treasurys even when economic data is deteriorating.

“The bears are still in control of the bond market,” he said. “The bond vigilantes are here and they're not going away.”

The iShares 20+ Year Treasury Bond ETF (TLT) rose 0.04% in Friday’s after-hours session, while the iShares 7-10 Year Treasury Bond ETF (IEF) edged up by 0.05%.

Schiff Warns The Bond Selloff Could Accelerate

Schiff believes the current Treasury selloff could eventually shift from an orderly decline into a much faster collapse.

“If the bond market couldn't rally on what was good news, what's going to happen when we get bad news?” he said.

That is the central concern behind his “mother of all bond bear markets” warning.

Schiff argued that a major deterioration in stocks could temporarily trigger a flight to safety and push investors back into Treasurys. But as long as the stock market continues to shrug off rising bond yields, he sees little reason for Treasury yields to reverse course.

“As long as the stock market keeps shrugging off the weakness in bonds, there's no reason for bonds to stop going down and there's no reason for rates to stop going up,” Schiff said.

His concern extends beyond Treasurys. Higher borrowing costs could increasingly pressure housing, autos, consumer credit and financial institutions as more borrowers refinance or default. “They're going to keep going up until something breaks,” Schiff said.

The economist ultimately compared the current environment to the early stages of a much larger financial deterioration.

During the after-hours session on Friday, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, rose 0.03%; the Invesco QQQ Trust ETF (QQQ) was flat; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.12%. Retail sentiment on Stocktwits toward the S&P 500 ETF was in the ‘extremely bullish’ territory at the time of writing.

Also See: Jim Cramer Warns Q3 ‘Earnings Deluge’ May Not Be As Strong As Previous Quarter — ‘Much More Difficult Backdrop’

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