Larry’s Note: Chris Lowe and I took some time Tuesday to discuss the state of these wild, skittish markets.

We covered the impact we’re seeing from volatility increasing and the bond market crashing.

This is one of the most epic moves I’ve seen in my career. As a reminder, ever since the latest Fed meeting on September 20:

• The bond market has felt like the closest thing I’ve ever seen to a crash.

• It’s been completely bidless at every level. And now it’s the first time where countries that would buy our bonds at any price – like China – have been net sellers of our bonds over and over again.

• The spread between the 2-year and 10-year yield has contracted to a point where the yield curve is likely to trade flat as rates themselves are going up. The market is saying “We now believe we’re higher for longer.”

I hope you enjoy our discussion. And if there are any topics or content that you’d like us to cover next time, let me know at feedback@opportunistictrader.com.

[Editor’s Note: Transcript has been lightly edited for clarity and brevity.]

Chris Lowe: Larry, it’s great to talk to you again. Thanks for joining me.

Larry Benedict: It’s great to be back. The markets have been going absolutely ballistic. The bond market has been getting annihilated.

And the markets are looking rattled in many, many ways coming into October, which generally is not a great month for U.S. equities. Things are looking really, really haywire.

Chris Lowe: We talked back in August, and it was all quiet. Nothing was happening, and volatility was low. And your message to your subscribers was, look, August tends to be a kind of a quiet month, but in September, we start to see kind of a different tone to the market and the seasonality there. It doesn’t tend to be a good month.

We’ve just been through September. I think the S&P was down about 5%. So what kind of trends are you seeing? Is this what you expected – that we get this volatility?

Larry Benedict: No, the volatility has been really picking up, and it’s going to continue to pick up.

I’ll be honest with you, I’ve been in the business a really long time and I’ve never seen the bond market the way this has been.

And I don’t know if I believe the numbers per se. I think the economy’s actually a lot weaker than is perceived. They just released a number on the jobs front, and it was so strong that it looked like the beginning of a bull market, which doesn’t make any sense.

Chris Lowe: Let’s break that down, Larry. What’s going on in the bond market?

Larry Benedict: This is the first time where sovereign nations – China, Japan, etc. – have been net sellers of our bonds and getting out of everything. And then, on top of that, you’re putting in these numbers that just don’t seem like they could possibly be this strong.

And those two ingredients are taking the bond market into the closest thing I’ve ever seen to a crash. How the equity market is actually holding up here is shocking to me.

Chris Lowe: So you’re saying, Larry, that bond prices have fallen a lot? Is that what we’re talking about?

Larry Benedict: Yeah, bond prices have fallen a lot. Yields have exploded. It’s ugly out there all around, and people are running for cover.

I do think it’s a good opportunity to buy bonds. If you have the ability to sit a bit, you’ll be able to do really, really well. And the beauty of [buying actual bonds] is you will always make your money back.

So if you buy a bond and [its price] gets slaughtered and you have an expiration date or a call date of four years, you’ll get your money back [in four years]. You might be locked in at a 2% [coupon] when rates are 5%, so that’s where people are missing out. But if you buy individual bonds, whether they be corporate or municipal, as long as they don’t default, you get back your money.

So if you buy $10,000 worth of bonds, you’re going to get back $10,000 and you will make the interest on it… So that’s the one nice thing about bonds for someone that can hold to duration.

Chris Lowe: And when you’re talking about bonds driving the market right now, is that because people can go online, buy a one-year T-Bill, which has almost no risk, and pocket a 5.5% one-year return?

And they don’t have to buy stocks, they don’t have to go for any volatility in the stock market? Is that what’s happening, that people are leaving stocks to grab these yields in the bond market?

Larry Benedict: 100%. It’s a better trade for right now, for sure. Obviously, people like the stock market because it moves a lot. You can make 3% in a day, but to me, I would be putting money in bonds here. The market is very, very skittish. It’s looking scary, and we’ll see what happens.

The move in the bond market is probably the most epic move that I’ve ever seen in my career, which is long. I mean, this is a full-out crash.

Chris Lowe: In bonds, which aren’t supposed to crash. I mean, the whole point of bonds is they’re not supposed to crash, right?

Larry Benedict: Right. But I would say the focus today is: Keep an eye on the bond market. Until that market turns, the U.S. stock market will be skittish. The market, as a whole, is probably a slight bit oversold short-term, but it can’t catch a bounce until the bonds catch a bounce.

But this is crazy territory for bonds. I mean, now we’re at 5%. How is that not slowing the U.S. economy at all?

So it’s going to be interesting to see how it all settles out.