1) Commercial Real Estate Foreclosures: Commercial real estate forerclosures are a big looming problem. Unlike residential mortgages, which can last 30 years, commercial real estate mortgages usually must be paid off or refinanced within five years. Commercial properties mortgages issued during the boom years 2005-2007 are approaching their maturity dates. About $1.4 trillion in debt is expected to mature and needs to be rolled over the next three years. About half will be underwater by 2011.
2) Rising Debt, Deficits and Higher Interest Rates: In most past recessions debt has been reduced, but this time, because of all of the bailouts, debt has increased rapidly. Total credit debt is probably more than $50 trillion, nearly four times GDP. Unfunded liabilities like Medicare, Medicaid and Social Security increase the total to over $100 trillion. At some point in the next few years, bond investors will demand higher interest rates, and will no longer accept real losses in return for safety.
3) Another Decade of Zero Job Growth: The last decade has resulted in zero job growth which is the worst result since the 1930’s. If this continues, we could see another lost decade similar to what has happened in Japan since 1989.
4) A Double Dip in Residential Housing Prices: Residential housing seems to be improving somewhat, but it is unclear how much of this is due to government bailout programs to Fannie and Freddy along with TARP (Troubled Asset Relief Program) and HAMP (Home Affordable and Modification Program). What will happen when these programs expire?
In traditional asset allocation, fixed-rate US Government Bonds are treated as a low risk asset class. But if significantly higher yields and inflation are coming longer term, fixed rate bonds seem like a questionable choice for investors in or near retirement age, unless there are risk management controls applied such as trailing stop losses. Floating rate bonds and/or inflation-adjusted bonds could be a better choice for longer term buy and hold investors.