Many sectors of the bond market have soared this year, so much so that some experts say bonds represent a new bubble.
Junk bonds, as measured by the Merrill Lynch High-Yield Index, have soared 46.9 percent so far this year, compared to about 13.5 percent for the Standard & Poor’s 500 Index. Investment-grade corporate bonds and municipal bonds are beating the S&P too.
With the economy still falling 0.7 percent annually as of the second quarter, investors are beginning questioning the bond rally.
“I don’t quite see the fundamentals of how this works,” Thomas Atteberry, a partner at First Pacific Advisors, which manages $11.5 billion, told The New York Times.
“If I don’t think I have a sustainable economic recovery, how do I justify these prices? How do I justify these yields? You go, ‘Wait a second.’”
Even Treasuries are up in price over the past three months, though that would make more sense in a time of economic uncertainty.
Bonds outside of Treasuries plunged during the financial crisis that began late last year in synch with the stock market. Since then investors have grown more comfortable about the fate of corporations and municipalities.
Some of these investors are betting that corporate and muni bonds will rise even further.
Still, there’s plenty of reason for caution.
Bond "spreads are back to their historical averages. Maybe the easy money has been made," Jamie Cox, managing partner of Harris Financial Group, told Reuters.
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