Shrodinger's Bond Market Offers Best Bear Setup in 50 Years

Few traders have experienced a market where AAA govt credit collapses. I don't mean fake AAA like Greece, I mean something people really think is AAA. Mortgages might count in 2008. Use your imagination for how a bond panic similar to 2008, except instead of AIG it's the State of California, and you have some idea of the disaster that could be coming to financial markets. This is the worst looking chart for municipal bond funds in "forever."

I have two ideas simultaneously in mind. One is deflation like in 2008, 2011, 2014, 2018, 2020. Bond rally big time after making a final low.

The other idea is that bond yields finally price in CPI inflation up at 8 percent. It wouldn't take much to trigger a collapse in the bond market. The Fed funds rate was double-digits last time inflation was this high. A rapid repricing of bonds to simply account for inflation being in the 3 to 5 percent range going forward would cause a financial market calamity. The losses in municipal bond funds would be catastrophic because of leverage, nobody is expecting these types of bonds to plummet. It would unleash pure terror among retirees and other conservative investors, including pension funds who could see a decade of returns wiped out in days or weeks.

Long story short, I'm not predicting a collapse will happen from here. The setup is in place for one though...and I wouldn't want to go into this setup with no risk on the table, be in equities, bonds, currencies and so on.