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The “Most Overpriced, Oversupplied, Over-owned Market in History”

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The U.S. Treasury this week announced plans to retire $35 billion in notes, the first time the government has paid down debt since 2007.

It’s a significant milestone for Treasury and $35 billion is a lot of money for mere mortals, but barely a drop in the $16.7 trillion bucket of our nation’s debt.

Among others, Michael Pento, president of Pento Portfolio Strategies, believes the U.S. Treasury market is a massive bubble destined to pop with devastating consequences.

U.S. Treasuries are “the most overpriced, oversupplied and over-owned market in the history of American markets,” says Pento, citing current Treasury yields as 550 basis points below the 40-year average, the massive inflows into bond funds (nearly $120 billion from 2008-2012) and the 140% increase in issuance since the end of 2007.

Unlike most, Pento is willing to put a timeline on when he believes the bond bubble will burst, which is the theme of his not-so subtly titled new book: The Coming Bond Market Collapse.

Sometime in 2015-16, foreigners creditors will conclude with a high degree of confidence “’it’s impossible the U.S. will ever pay me back in real terms and I demand a higher interest rate,’” he predicts. “It will be just like Greece.”

Again, many others have made similar predictions in the past and, to date, have continually been proven wrong. “The world wants ‘em,” says longtime Treasury bull Gary Shilling, who continues to advocate a “buy and hold” strategy for U.S. bonds.

Related: Gary Shilling: The 'Great Disconnect' Between Weak Economies and Strong Markets Won’t Last

Such talk is heresy to Pento, who is steadfast in a long-held view the bond market is a bubble destined to burst. Once again standing out from other forecasters of bond market doom, he also lays out strategies to mitigate the damage. For individual investors, his advice is simple: “avoid Treasuries like the plague.”

For the U.S. government, his advice is a bit more nuanced and features the following recommendations, which go well beyond pure economics, as discussed in the accompanying video:

  • Let the deleveraging process happen
  • Strengthen & stabilize the dollar
  • Allow rates to rise to supply of savings vs. demand for money
  • Balance the budget
  • Aggressively reduce regulations
  • Simplify the tax code
  • Expand fair & free trade
  • Overhaul education

Related: The Bull Case for Gold Hasn’t Changed One Iota: Michael Pento

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

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