Bonds, once seen as the safe-haven from risky equity investments, are in a bubble and due to pop, investment experts say.
Their words today echo the February 2010 edition of Financial Intelligence Report, which headlined its main article: “The Coming Bond Bubble Meltdown.”
In it, investment cycles expert and author David Skarica predicted a government debt crash was already in the pipeline for fixed-income investors.
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Many baby boomer investors, sour on stocks, have invested heavily into bonds during the last several years out of fear that equities were too risky, an investment trend that is fueling a bubble.
In fact, more than $380 billion in investments will pour into bond funds in 2010, more than went into domestic stock funds during the last decade and up slightly from the record $376 billion in 2009, Money Magazine reports.
“The bond market is a bubble,” Robert Froelich, senior managing director at the Hartford Financial Services Group, told the magazine.
“And it’s getting ready to burst.”
Even though stock markets are again in crisis mode, many investors continue to pour money into bonds — at their own risk.
The move to bonds is not new. In 2000, when the dot-com bubble burst, stocks lost half their value over the next three years while corporate bonds rose by 50 percent, Money reports.
Nevertheless, few investors today know remember it’s like to go through a bond bear market, since falling interest rates over the last three decade have made fixed-income seem stable and attractive.
That will change very soon, especially when inflation returns and wipes out the value of holding many bonds.
“I don’t think the public understands they can lose money in bond funds,” says James Swanson, chief investment strategist at MFS, an asset management firm in Boston.
And according to the world’s largest bond manager, Pimco, inflation could soon rear its ugly head even though price pressures are non-existent today.
The U.S. and European economies have been printing money in efforts to kick-start their ailing economies, which will send consumer prices rising, says Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, which oversees more than $1 trillion in investments, mainly bonds.
“This potential evolution from disinflation to inflation will likely proceed at different speeds in different parts of the globe. It is already well in train in emerging economies and will remain so,” El-Erian told Reuters.
“Over the medium term, the United States will be next, with Europe and even more, Japan, lagging.”
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Across the globe, governments are using taxpayer money to bail out their financial systems, a trend that Pimco chiefs describe as “state capitalism” that ultimately lowers expectations for returns in the bond markets.
“For investors, this translates into a changing configuration of risks and returns — if you like, a world with a flatter distribution of potential outcomes, fatter tails, and a baseline that is subject to the unsettling dynamics of multiple equilibriums,” El-Erian warns.
In short, no place to hide, as stocks swing wildly and bond prices fall through the floor.
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