Executive Summary

• The three main signs presaging a bond-bubble collapse are now evident
• Why the Fed will fail to get new credit debt growth at the rate it needs
• The return of CDOs and other risky tactics that show market participants have returned to reckless thinking
• How a bond market collapse will play out
• How to product yourself and your wealth during the extreme pain of a bond market collapse

If you have not yet read Part I: Investors Beware: Market Risks Today Are Higher than Ever, available free to all readers, please click here to read it first.

The dangers growing in the bond market are, of course, all the result of the Fed, et al., cramming the real rate of interest on Treasury bonds into negative territory, starving investors for income, and forcing them to chase yield whenever and wherever it can be found.  Given a long enough time without a serious disruption in the markets, you eventually find yourself exactly where we are, with everyone chasing yield because they have to. Hey, everybody else is, and nothing bad has happened yet, right?

Of course, the odds of this ending well are practically zero.

How ridiculous has it become?  How about a company currently in bankruptcy proceedings able to sell bonds at investment-grade yields?

AMR Bankruptcy Yields Record-Low Bond Coupon

Mar 13, 2013

American Airlines is selling investment-grade debt even as it spends a 15th month in bankruptcy while bond buyers look ahead to the merger with US Airways Group Inc. (LCC) that will create the world’s largest carrier.

The AMR Corp. (AAMRQ) unit issued $663 million of so-called enhanced equipment trust certificates yesterday that included a portion paying 4 percent, matching the record low coupon for similar airline debt, which was first awarded to United Continental Holdings Inc. in September, according to data compiled by Bloomberg. American is also seeking to refinance about $1.3 billion of bonds backed by aircraft after receiving court approval to do so in January.

By the time you have 'investors' offering money to a perpetual basket-case like AMR – a company that also happens to be in bankruptcy proceedings at present – at investment-grade 4% yields, you know you are in the midst of a crazy bubble.