Tags: Bond | market | Bubble | pop | Stocks

Advisers: Bond Market Bubble to Pop, Catapult Stocks

Tuesday, 06 Apr 2010 09:53 AM

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Investors' love affair with bonds appears to be ending, leading many financial advisers to expect a surge in stocks.

"This is the beginning of the end,” says Bob Froelich, senior managing director at The Hartford.

“The bond market is a bubble. It's getting ready to burst," he recently told CNBC.

Since the financial crisis almost three years ago, investors have bought bonds as a hedge against continued economic peril, as the sharply higher level of money flowing into bond funds shows.

Foreign governments, particularly China and Japan, have bought U.S. debt heavily as well, which helped finance stimulus and bailout programs.

Bond buying by foreign countries comes with a cost — the inevitability that supply will eventually outstrip demand, forcing issuers to pay higher yields in order to attract buyers.

Moreover, the Federal Reserve cut its key lending rate over the past three years to near zero, causing bond yields to slip even as the government flooded the economy with debt and deficits.

Even so, international appetite for U.S. Treasuries remained fairly strong up until last week's auctions, when bonds were obviously less well received.

While the debt sales were hardly a disaster by historical standards, they were seen by some as a signal that the government's recipe was no longer working.

The latest S&P Case-Shiller home-price index showed that home prices rose in January, prompting an uptick in the stock market, huliq.com reports.

The news comes at time when the Federal Reserve is making moves to exit from its mortgage bailout tactics including the buying of $1.25 trillion in mortgage-backed securities.

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