Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Palladium Surges above $2,400. Is It Sustainable? - 27th Jan 20
THIS ONE THING Will Tell Us When the Bubble Economy Is Bursting… - 27th Jan 20
Stock Market, Gold Black Swan Event Begins - 27th Jan 20
This Will Signal A Massive Gold Stocks Rally - 27th Jan 20
US Presidential Cycle Stock Market Trend Forecast 2020 - 27th Jan 20
Stock Market Correction Review - 26th Jan 20
The Wuhan Wipeout – Could It Happen? - 26th Jan 20
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Is the U.S. Treassury Bond Bubble About to Burst?

Interest-Rates / US Bonds Aug 25, 2010 - 06:08 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleJason Simpkins writes: Bonds have provided a welcome safe-haven for investors seeking shelter from the financial maelstrom of the past two years. But now many analysts fear bonds have entered bubble territory and pose a rising threat to their holders.

The amount of money flowing into bonds is "probably not sustainable on a consistent basis" Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc., told Bloomberg News. "Eventually it won't be sustainable. Whether that means five years from now or five weeks is a little difficult to tell."

Bond funds have attracted more investment than stock funds for 31 straight months, which matches the record streak that ran from 1984 - 1987. Bond funds attracted $559 billion in the 30 months through June, according to the Investment Company Institute (ICI). Meanwhile, investors withdrew $209.4 billion from U.S. stock funds and $24.4 billion from funds that buy foreign stocks.

"No one seems to want very risky assets but they still want some kind of yield," Toby Nangle, the director of asset allocation at Baring Asset Management in London, told Bloomberg. "People generally view corporate debt as not a terribly scary place to be."

Indeed, while stocks have boomed and busted since 1997, income-oriented investments have climbed steadily, as you can see in this chart of the venerable Vanguard Wellington total return fund (VWELX). The fund kept pace with pure stocks in the stirring run from 1997 to 2000, but then kept on going during the tech bear market of 2000-2002. Bonds were thrashed in the credit bear market of 2008, but have recovered briskly since. In fact, the Vanguard Wellington bond fund has outstripped the Standard & Poor's 500 Index by six-times since 1997.

But bonds' exhilarating run-up now has some analysts uttering the dreaded "B" word: Bubble. These analysts say that the surge in bonds is comparable to the technology bubble of 10 years ago.

Indeed, the amount of cash that flowed into bond funds in the two years through June approaches the amount of money that went into stock funds during the dot-com bubble at the start of the decade. Investors poured $480.2 billion into bond funds in the two years through June, compared to the $496.9 billion that went into stock funds in the period from 1999 - 2000.

It's not just corporate debt that's raising eyebrows, either. The similarity between the past 10 years' action in U.S. Treasuries and the tech stock mania that inflated the Standard & Poor's 500 Index from 1990 to 2005 "should cause anxiety, especially when one considers the high correlation and what it suggests about plausible future trends for bonds," according to Citigroup Inc. (NYSE: C) strategist Tobias Levkovich.

The coefficient of determination between the two is a whopping 87% according to Citigroup research. The higher that number is, the more closely the two data sets move in lockstep.

Treasuries soared yesterday (Tuesday) with yields on the 30-year and 10-year notes falling to their lows levels in 16 months. The yield on the two-year note approached record low of 0.4547%, reached Aug. 20.

The government yesterday sold $37 billion of two-year securities, drawing a record low yield of 0.498%. The sale's bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.12, compared with an average of 3.19 at the past 10 auctions.

"In 2000 or late 1999, we saw massive amounts of money going into the equity market at just the wrong time," Lekovich said in an Aug. 20 radio interview with Bloomberg. "I feel the same way when I look at all the money going into bonds."

Still, for bonds to go bust, a major shift in investor sentiment is needed and few analysts believe investors' risk appetite will return anytime soon.

"The technology bubble that popped beginning in 2000, the liquidity crisis that began in 2007 and 2008/2009's deep recession have provided dramatic illustration over the last 10 years that markets hold risk," Franklin Resources Inc. (NYSE: BEN) said in a report on its Web site. "With the benefit of hindsight, some investors might have chosen to avoid equities during the last decade. But many investors are turning their backs on equities now - after one of the worst decades the stock market has ever seen."

And while investors remain skittish about stocks, the U.S. Federal Reserve continues to support the bond market. The Fed will purchase about $18 billion of U.S. debt by the middle of September using proceeds from maturing mortgage bonds. The central bank bought $1.35 billion of Treasuries yesterday, taking its total since beginning the program on Aug. 17 to $7.51 billion.

"Right now, the Federal Reserve is purposefully engineering the rally in bonds to lower mortgage rates and funnel cheap credit to consumers, banks and businesses who want it," says Money Morning Contributing Editor Jon D. Markman.

"What the consequences will be, and whether this strategy of unprecedented monetary policy support will even work, are questions that will be answered in years to come," he added. "For now, all we can do is identify these trends and position ourselves to profit from them while they last. That's why I've recommended a selection of bond exchange-traded funds (ETFs). Eventually, though, this latest bubble will burst."

Indeed, there eventually will come a time when investors regain confidence and return in force to the stock market. But if they wait too long, they risk missing a potential rally.

Jack Ablin, who helps manage $55 billion as chief investment officer at the Chicago-based Harris Private Bank, says institutions are likely to lead a rebound in the stock market ahead of retail investors.

"What will happen is that the market will rally first, and retail investors will eventually jump back in," he told Bloomberg.

John Sweeney, an executive vice president at Fidelity Investments, cautioned: "Someone who is waiting for stability is likely to miss the upside."

[Editor's Note: Are you seeking investment protection in the bond market? Have you adjusted your strategy to involve fewer equities and more bonds? Do you think there is a bond bubble forming - similar to the dot-com bubble - that will take some investors by surprise? If you haven't dove into fixed-income securities, then what stocks or other instruments have you included in your portfolio for safety measures?

Send your thoughts, questions and concerns to]

Source :

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules