I can't tell you how long I have been hearing people say that bonds just can't go any lower. I remember people telling that to Harry Browne on his radio show when he was discussing his permanent portfolio plan. Just for a time frame, Harry Browne passed away over 5 years ago.
The 10-year yield is currently just under 2% as of this writing. It was down to almost 1.8% just a few days ago. Needless to say, mortgage rates are near all-time lows right now.
I am an advocate of the permanent portfolio plan, which consists of 25% long-term government bonds. While bonds may seem like a terrible investment idea, they seemed like that 5 or more years ago too. Yet bonds have performed quite well for the permanent portfolio. They have also helped lessen the volatility of the plan. In the fall of 2008, stocks and gold both did terrible and the bond portion helped keep the short-term losses down.
While I advocate the permanent portfolio, I do say that it is reasonable to speculate with a certain portion of your money, as long as it is money that you are willing to risk and willing to lose. So the question remains, is it finally time to bet against bonds?
Bonds go up in value when interest rates go down. In a recessionary/ deflationary environment, interest rates will probably go down as we saw three years ago during the major economic turmoil. Of course, interest rates can also go up if there is a risk of default (see Greece and the other PIIGS) or if there is high price inflation (see the 1970's).
While I think that higher price inflation is almost inevitable, I don't discount the possibility of another deep recession. It continues to be a tug-of-war between the two. We may end up with an inflationary depression eventually, but I think one side will probably shine in the short run.
At this point, I am still not ready to short the bond market. I think it is a good speculative play for day traders who get in and out quickly and play the swings, but I am not confident that interest rates will be going up significantly in 2012. Aside from the threat of a recession, there is also the threat of the Federal Reserve. The Fed can buy U.S. treasuries any time it wants. The Fed literally has an unlimited amount of money. I'm not sure that I want to bet on something going down in value that the Fed can buy at will, especially when the Fed keeps coming up with more tricks.
I think interest rates will go up eventually. When they do, it will be a reflection of the Fed's money creation. It will be a response to price inflation. It will be a response to a lower demand for money. I doubt it will be like Greece where people fear a default. Perhaps that day will come, but not in 2012. It is amazing how long the Fed and the government can kick the can down the road.