Tags: bond | treasurys | prices | bubble

Experts: Why Bond Prices Won't Collapse

By    |   Friday, 25 April 2014 10:34 AM

Many pundits predict that bond prices will collapse if — or when — interest rates rise. They contend the "bond bubble" will pop as bond prices sink much like tech stocks in 2001 or home prices in the past decade.

Not everyone agrees.

"This is seriously misguided thinking from any conceivable perspective," writes Center for Economic and Policy Research Co-Founder Dean Baker for Fortune.

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Most of the $40 trillion bond market is short-term debt, which doesn't lose value when rates rise, he says. Durations of five years or more, which could lose value, account for less than half of the total bond market.

Even those bonds probably won't see their prices drop by 10 percent. Baker adds. In an extreme case, if 30-year mortgage rates spiked from their current rates of about 4.15 percent to 5.5 percent, the price of new 30-year mortgages would fall about 19 percent.

However, since most outstanding debt has less than 30 years to maturity, losses would be less.

By comparison, the stock market dropped by more than half from 2000 to 2002, and the home prices fell by about a third in the housing bust.

Markets learned what can happen when rates jump when the then Federal Reserve Chairman Ben Bernanke speculated about tapering the Fed's bond purchasing program last year. The 30-year mortgage jumped from 3.5 percent to 4.5 percent, Baker notes.

"If there was any serious stress created by the associated fall in bond prices, the financial media neglected to mention it."

Bonds are not the same as stocks and housing in another way, he adds.

Rising stock and home values both boosted spending. When their prices collapsed, spending also dropped, causing the economy to fall into recession.

That kind of calamity won't happen if bond prices drop.

Rob Gleeson, head of investment adviser FE Research, agrees talk of bond bubble is highly over-rated.

Despite all the bond bubble talk, investors would have been better off holding a diversified portfolio instead of dumping bonds and piling into equities, Gleeson writes for Fund Strategy.

"It is valid to suggest that bond investors will not make the same sort of gains that they have in recent years. However, it is wrong to say that they will inevitably lose you money."

Bond prices may fall as rates rise, but then again an escalating Ukrainian crisis, a Chinese banking crisis or other disaster could cause stock markets to crash. Holding bonds would be wise in one of those scenarios.

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Many pundits predict that bond prices will collapse if — or when — interest rates rise. The "bond bubble" will pop as bond prices sink much like tech stocks in 2001 or home prices in the past decade.
bond, treasurys, prices, bubble
431
2014-34-25
Friday, 25 April 2014 10:34 AM
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