Tags: bond | bubble | forming | gurus

Bond Bubble Forming, Gurus Warn

By    |   Friday, 11 Jun 2010 10:24 AM

Bond prices continue to defy gravity, with the 10-year Treasury yield dropping about 65 basis points this year to 3.20 percent.

But the party may end soon. That’s because the Federal Reserve will eventually raise short-term interest rates from their current record lows near zero.

In addition, the exploding government debt burden threatens to spark an inflation outbreak, which would push long-term rates higher too.

Government debt totaled 56 percent of GDP last year.

Between 1985 and 2009, bond-fund returns fell in only three years — 1994, 1999 and 2008 — according to Morningstar, The Wall Street Journal reports. U.S. stock funds fell in six years during that period.

"People are conditioned to push the 'fixed-income' button (in times of trouble), because for nearly 30 years you didn't have to do anything to make money," Bill Eigen, manager of J.P. Morgan Strategic Income Opportunities Fund, told The Journal.

But that could change soon.

"It's fallacious reasoning that you can't lose money in bonds," James Swanson, chief investment strategist at MFS Investment Management, told the paper.

With bond prices at risk of a plunge, many experts recommend that investors turn to safe dividend-paying stocks, such as utilities, instead.

You certainly don’t want to be in Treasuries if a recent Bloomberg survey of 60 economists turns out to be accurate.

The median forecast in that poll was for a 3.80 percent yield on the 10-year Treasury note by year-end.

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Bond prices continue to defy gravity, with the 10-year Treasury yield dropping about 65 basis points this year to 3.20 percent. But the party may end soon. That s because the Federal Reserve will eventually raise short-term interest rates from their current record lows...
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2010-24-11
Friday, 11 Jun 2010 10:24 AM
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