# The Great Bond Bubble of 2010



## Belguy (May 24, 2010)

According to the linked column in today's Wall Street Journal, there is a bond bubble forming that could have a greater overall impact on investors than did the tech bubble of a decade ago.

Bonds should NOT be considered as a safe haven if you believe that interest rates are about to soar.

http://online.wsj.com/article/SB10001424052748704407804575425384002846058.html


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## Mike59 (May 22, 2010)

I've been allocated as high as 30% junk bonds earlier this year (teased by the spectacular yields and low default rates), but I'm slowly selling them back week by week toward a mostly cash position, in anticipation of a rocky September as only god knows where interest rates are going to go.

Now that there's officially nothing safe worth investing in, it's cash and precious metal mining funds until the next crash... let's just get this second dip over with so I can start buying equities again


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## scomac (Aug 22, 2009)

Belguy said:


> According to the linked column in today's Wall Street Journal, there is a bond bubble forming that could have a greater overall impact on investors than did the tech bubble of a decade ago.
> http://online.wsj.com/article/SB10001424052748704407804575425384002846058.html


Financial pornography at its worst! 




> The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.


Conveniently ignoring the fact that the yield is the quoted 1% plus inflation adjustment and nothing at all like the tech stocks of 10 years ago in that the credits are backed up by the full pledge of the US gov't. The mis-information carries on from there....



> From our perspective, the safest bet for investors looking for income and inflation protection may not be bonds. Rather, stocks, particularly stocks paying high dividends, may offer investors a more attractive income and inflation protection than bonds over the coming decade.


No mention of sureness of capital preservation here. Sure yields are better, but if capital is eroded, purchasing power will decline none-the-less.

It used to be the university professors prided themselves on dealing with the facts. It would appear today that talking points from consultancy work are more important. As always, don't confuse who is paying the piper to play the tune.


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## andrewf (Mar 1, 2010)

There's absolutely no indication rates will rise much, soon. Unless you're pretty far out on the yield curve, I don't think there is much risk.


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## dogcom (May 23, 2009)

This is a tough one because we are talking about the US dollar decline to nothing causing hyper-inflation at a time when US consumers can't buy very much.

Ok so they buy into the Euro but look where that brings us, again a tough one. Gold is good because it can't be printed up so easily. Then again gold is not a big market the Euro is not great and you must avoid risk. So that leaves us with the US dollar or treasuries or so I think.

In the end this is not such an easy exercise as one might think. As far as tech goes you just don't buy it and buy something else and that is as easy as it gets. You can do that with gold as well but in a time when currencies are in trouble gold shines as money.


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## Jungle (Feb 17, 2010)

The last time I thought bonds were going to tank, they just went higher, yeilds got lower. Now I am seeing gains of 10%. Still better than savings accounts and GICs.


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## MoneyMaker (Jun 1, 2009)

LOL Bonds..

Here's a good article entitled: The Fear and The Flight of the Individual Investor

http://advisoranalyst.com/glablog/2010/08/17/the-fear-and-the-flight-of-the-individual-investor/


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## Belguy (May 24, 2010)

One has to wonder when we are closing in on "surging interest rates" when the U.S. jobless claims just reached a 9 month high of 500,000 sending stock markets tanking again today.

http://online.wsj.com/article/BT-CO-20100819-708531.html


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## canadianbanks (Jun 5, 2009)

I still believe that interest rates will increase sharply in not too distant future. The interest rates have been suppressed artificially for too long, and sooner or later something's gotta give.


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## andrewf (Mar 1, 2010)

canadianbanks said:


> I still believe that interest rates will increase sharply in not too distant future. The interest rates have been suppressed artificially for too long, and sooner or later something's gotta give.


See Japan. These conditions can persist for long periods.


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## Belguy (May 24, 2010)

Another nice summer day!! How about a nice double dip??

And so, maybe we should take our money out of bonds and invest in stocks instead!!

Or, maybe not----

http://www.businessinsider.com/gary-shilling-deflation-2010-8


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## dogcom (May 23, 2009)

Increasing interest rates sharply suggests the end game is here. At some point it must end so we will see how far this debt overload can get.


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## Spidey (May 11, 2009)

I think most bond investors have taken the concerns into consideration by placing a substantial portion of their bonds in either short-term or real-return.
If bonds crash, short-term bonds can simply be rolled into higher yielding products as they reach maturity.


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## CanadianCapitalist (Mar 31, 2009)

canadianbanks said:


> I still believe that interest rates will increase sharply in not too distant future. The interest rates have been suppressed artificially for too long, and sooner or later something's gotta give.


Can you explain how "interest rates have been suppressed artificially"? Yes, the Bank of Canada sets short-term interest rates and hence T-bill rates. But interest rates on bonds are set by the market and BoC's influence on this market is limited. The bond market is clearly signaling that it expects inflation to stay very low:

http://www.bankofcanada.ca/en/rates/bonds.html

My opinion is more often than not, the bond market is right.


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## davext (Apr 11, 2010)

CanadianCapitalist said:


> Can you explain how "interest rates have been suppressed artificially"? Yes, the Bank of Canada sets short-term interest rates and hence T-bill rates. But interest rates on bonds are set by the market and BoC's influence on this market is limited. The bond market is clearly signaling that it expects inflation to stay very low:
> 
> http://www.bankofcanada.ca/en/rates/bonds.html
> 
> My opinion is more often than not, the bond market is right.


My understanding is that when the BOC raises the prime rate, this will result in better opportunities for returns. Even a high interest savings account would pay more, proportional to the raise in rate. As a result, the demand for the bonds at the current yield would decrease and would result in bond prices dropping to offer higher yield. Therefore, it is better to own shorter term bonds to reduce the volatility in bond prices.


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## kcowan (Jul 1, 2010)

davext said:


> Therefore, it is better to own shorter term bonds to reduce the volatility in bond prices.


+1

Under 5 years and roll them.


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## scomac (Aug 22, 2009)

kcowan said:


> +1
> 
> Under 5 years and roll them.


I prefer the 5 yr. to 10 yr. window as there is a big pick-up in yield for extending term. If you do the math, you will discover that yields on the short end must move up substantially, upon rolling over, just to break even. There was an article published in the spring by Scotia Macleod, IIRC, that went into the details.

It is a curious human foible that even though we are told to ignore volatility when investing in equities because it is to our benefit, that volatility in bonds is seen as such an evil when you have the full knowledge that the bond will mature at par. What it does in the mean time is largely irrelevant as the return on the bond was set when it was purchased. You have no such guarantees with stocks as the past 10 years have clearly demonstrated.


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## andrewf (Mar 1, 2010)

scomac said:


> I prefer the 5 yr. to 10 yr. window as there is a big pick-up in yield for extending term. If you do the math, you will discover that yields on the short end must move up substantially, upon rolling over, just to break even. There was an article published in the spring by Scotia Macleod, IIRC, that went into the details.
> 
> It is a curious human foible that even though we are told to ignore volatility when investing in equities because it is to our benefit, that volatility in bonds is seen as such an evil when you have the full knowledge that the bond will mature at par. What it does in the mean time is largely irrelevant as the return on the bond was set when it was purchased. You have no such guarantees with stocks as the past 10 years have clearly demonstrated.


If you have a portfolio of 5-10 year bonds, you won't be holding them to maturity. You'll be selling them off at 5 years to maturity at the prevailing yield, in which case the volatility is relevant.


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## scomac (Aug 22, 2009)

andrewf said:


> If you have a portfolio of 5-10 year bonds, you won't be holding them to maturity.


Of course I will. I think you miss understand the point I was trying to make. kcowan suggested to roll a 5 year bond ladder. I was arguing in favour of extending the ladder out to 10 years on the grounds that the yield pick-up for term extension was more than adequate for having less of the portfolio exposed to current rates in a rising rate environment. At no point did I advocate selling bonds prior to maturity.


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## alphatrader2000 (Aug 18, 2010)

CanadianCapitalist said:


> Can you explain how "interest rates have been suppressed artificially"? Yes, the Bank of Canada sets short-term interest rates and hence T-bill rates. But interest rates on bonds are set by the market and BoC's influence on this market is limited. The bond market is clearly signaling that it expects inflation to stay very low:
> 
> http://www.bankofcanada.ca/en/rates/bonds.html
> 
> My opinion is more often than not, the bond market is right.


Very easy, by buying the long term bonds. US Government start doing that again last week.


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## Larry6417 (Jan 27, 2010)

At least one prominent investor, Nassim Taleb, is betting on a collapse of (US) bonds. See www.bloomberg.com/news/2010-08-11/-...-he-bets-on-collapse-of-government-bonds.html


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## andrewf (Mar 1, 2010)

The yield pickup for the 5 to 10 year part of the curve is very low right now. I wouldn't be a hurry to buy those bonds at this moment. I don't disagree that a 7 or 10 year bond ladder might be a good strategy in general, but right now those bonds are very expensive.


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## Robillard (Apr 11, 2009)

I was holding some very long-dated corporate bonds (tenor > 25 years), but I dumped them last month since I couldn't see long-term yields and credit spreads getting much narrower. I probably could have sold them for a larger premium over par if I had waited a bit longer. 

That being said, I still felt it was the right time to get out. Bond performance is largely a function of yields, inflation/deflation and changes in interest rates (leading to capital gains). If everything remains steady, then your nominal return will just be the bond yield. Bonds will only outperform this when interest rates can fall, or if deflation takes hold. 

I just have a hard time seeing how interest rates can get significantly lower than they are now. As a rule of thumb, 10-year government bonds should yield approximately the long-term trend real GDP growth rate plus a premium for expected inflation. With Canadian 10-year government bonds yielding 2.82%, investors are betting that real GDP growth and inflation will be less than this over the 10-year period. I think investors are seriously underestimating the probability of mean reversion (returning to historical norms) for both GDP growth and inflation.


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## scomac (Aug 22, 2009)

andrewf said:


> The yield pickup for the 5 to 10 year part of the curve is very low right now. I wouldn't be a hurry to buy those bonds at this moment.


It's not the best at the moment with provincials giving you about 80 basis points and corporates 115-130. That is less than it was in the spring, but the whole point of rolling a ladder is to eliminate guessing on interest rates. You just mechanically add to the longer end. Chances are, if you're trying to time the market, you'll probably get it wrong.


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## Belguy (May 24, 2010)

Any thoughts on the following junk bond ETF:

http://seekingalpha.com/article/220390-just-one-etf-companies-junk-is-investors-high-yield-treasure

I already am invested in this ETF. In your opinion, is it a 'hold' or a 'sell'?


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## andrewf (Mar 1, 2010)

scomac said:


> It's not the best at the moment with provincials giving you about 80 basis points and corporates 115-130. That is less than it was in the spring, but the whole point of rolling a ladder is to eliminate guessing on interest rates. You just mechanically add to the longer end. Chances are, if you're trying to time the market, you'll probably get it wrong.


Dunno--you can get 2% in a daily savings account. Government bonds yield 2.68% for 5-10 years according to the Bank of Canada website. Is it worth it to take the interest rate risk to pick up that extra 68 basis points?


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## Mike59 (May 22, 2010)

Belguy said:


> Any thoughts on the following junk bond ETF:
> http://seekingalpha.com/article/220390-just-one-etf-companies-junk-is-investors-high-yield-treasure
> I already am invested in this ETF. In your opinion, is it a 'hold' or a 'sell'?


I was heavily invested in Junk bonds from last winter through now, and find myself back tracking toward a nearly all-cash position. I'm down to about 10% of the portoflio in high yield bonds, and will likely liquidate the rest over the next 10 days before September comes.

I say sell for a few reasons: 
- equities are at risk for a bad fall season (perhaps I believe too strongly in moving averages / death-cross/Hindenburg Omen etc.) and 2008 showed how correlated JNK is to the major stock indices. 
- bonds are at risk: I'm not sure how quickly interest rates will rise but when they do, high yield bonds will get slaughtered given their voltaility. They've been a risky play all along...and good things must come to an end. 
- I see few reasons why junk bonds would remain a good investment going forward. They are linked to stocks, linked to bonds, and there doesn't seem to be a bright spot anywhere on the horizon. I think stagflation would be the only somewhat good scenario for these investments. Even deflationary depression would likely hurt JNK given the correlation with falling equities in such a scenario. 

Here's to sitting on the sidelines smelling smelly cash (and diving back into the market when the DOW hits 4000)


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## Jungle (Feb 17, 2010)

Mike59 said:


> I was heavily invested in Junk bonds from last winter through now, and find myself back tracking toward a nearly all-cash position. I'm down to about 10% of the portoflio in high yield bonds, and will likely liquidate the rest over the next 10 days before September comes.
> 
> I say sell for a few reasons:
> - equities are at risk for a bad fall season (perhaps I believe too strongly in moving averages / death-cross/Hindenburg Omen etc.) and 2008 showed how correlated JNK is to the major stock indices.
> ...


I'm thinking of cashing out on some bonds before the rate hike. The markets are tanking again today, so maybe it's a good time to sell? hmm..


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## Belguy (May 24, 2010)

I bought JNK a few months back mainly for diversification purposes and have never felt comfortable holding it. Over that period, it is down a little and would like to wait until I break even again but, then again, it could go down more.

During the 2008 recession, my 40% bond allocation saved me from jumping off the bridge as I watched my equity investments plummet.

Now though, I am not getting the same level of comfort from my bonds as the stock markets potentially get ready to plummet again.

I guess that 'cash' is the only current investment that permits a good night's sleep--especially for we older geezers!!


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## scomac (Aug 22, 2009)

andrewf said:


> Dunno--you can get 2% in a daily savings account. Government bonds yield 2.68% for 5-10 years according to the Bank of Canada website. Is it worth it to take the interest rate risk to pick up that extra 68 basis points?


Yabbut, you don't have to buy GoC's. It makes little sense if you intend to hold to maturity because you don't require the liquidity and that's really what you are paying for. The spreads I quoted were for over and above GoC's. Add the 68 to the figures I quoted and your yield pick-up above cash moves to 1.5-2%.


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## alphatrader2000 (Aug 18, 2010)

Larry6417 said:


> At least one prominent investor, Nassim Taleb, is betting on a collapse of (US) bonds. See www.bloomberg.com/news/2010-08-11/-...-he-bets-on-collapse-of-government-bonds.html


It is folie to listen to mr. Black Swan on investment advice. He is not known for such advice. As a matter of fact, based on his own books, he probably put his portfolio to benefit in the rare case that it doesn't happen. This advice is common sentiment on the street. The real question is can you be solvent long enough to enjoy the fruit when your short on these? Imagine being short some .net stock in tech bubble. You really had to time it properly


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## funinagg (Jun 10, 2010)

i guess balance and comfort is the key. as of net assets, i am keeping 80% cash in savings at 1%. remaining 20% is in PHN and BTG bonds, in RRSP and TFSA of course, at about 5%. got to take some risk to get some rewards. on balance bonds seem the best choice. and PHN and BTG are the best in managing them. short term bonds do not return enough to move from savings. junk bonds are too much like stocks so rather pick up some quality dividend paying stocks at the "right time". i guess "right time" will be when countries have their books back in order. comments?


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## Belguy (May 24, 2010)

My asset allocation is 60% equities, including emerging markets and precious metals, and I'm on this rollercoaster ride for the full thrill.


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## kcowan (Jul 1, 2010)

funinagg said:


> ...junk bonds are too much like stocks so rather pick up some quality dividend paying stocks at the "right time". i guess "right time" will be when countries have their books back in order. comments?


Are you willing to wait 10 years? I think there will be market opportunties before countries get the houses in order.


belguy said:


> My asset allocation is 60% equities


I think if you PV your pensions, you will find that your fixed portion is more like 60% to 70%, in line with traditional advice for the mix at your age. 

Of course, counting the JNK ETF as fixed is questionable.


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## funinagg (Jun 10, 2010)

kcowan said:


> Are you willing to wait 10 years? I think there will be market opportunties before countries get the houses in order.


i am hoping some countries will act and revert to normal balance sheet faster than others.

for now INDIA looks ok and maybe BRAZIL. but there is so little choice if I want to invest specifically in these countries! just one or two funds! any ideas?

i dont have the time and risk tolerance for individual stock so as of now i can consider only broad market funds.

i guess buy and hold for long-term in most countries is out of question. perhaps can try to buy low and sell high in the short-term (i.e. say buy at TSX 11K and sell at TSX 12K). but thats just guessing.


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## Belguy (May 24, 2010)

This may not mean much in the grand scheme of things but it was interesting to hear Kevin O'Leary say today that two thirds of his personal portfolio is currently in bonds and only one third in equities.

Meanwhile, my own portfolio is 60 percent equities and only 40 percent bonds and, unlike Kevin, I am already retired and he has far more assets than do I.

Is there something wrong with this picture?


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## BarryBonds (Sep 1, 2010)

I currently have all my money invested in this fixed income bond fund http://pdf.globefund.com/servlet/Fu...universe=MLI_POOLED&branding=manp&product_id=

If the so called bond bubble burst and the fund manager keeps all the bonds to maturity, nothing will burst for me right?


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## Tealeaf (Sep 6, 2010)

*Recent Issue*

There was an oversubscribed Issue of $400 Mn 1.5% RR due Dec 1, 2044 announced Aug 24 for settlement Aug 31.
Effective Yield was 1.335% with an Allotment ratio of 46.24%.

The Bond Prices should continue to reflect short term rate Pricing and
given the uncertainty out there in Markets and Economies, I cannot see 
these drooping significantly in the immediate future. Having said that, there was a drop over the past week of 10 bp, better than the 20 bp on the short end.

I will retain my smallish position as a continuing bulwark against the decline of the value of our money by incompetent politicians and bureaucrats along with a sizable Prec. Metals Portfolio 

GLTA


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