Tags: bond | bubble | Treasurys | pop

CNNMoney Survey: Bond Bubble May Have Just Started Leaking Air

Thursday, 04 Apr 2013 07:43 AM

By Michael Kling

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Many experts warn that a bond bubble, inflated by low interest rates, will pop when interest rates rise, creating massive losses and financial calamity.

That won't happen soon, according to financial professionals surveyed by CNNMoney. Rates won't be jumping up in the near term — or even the medium term for that matter, the investment pros say.

In fact, 90 percent of the 30 investment strategists and money managers participating in the survey predict rates will increase only slightly this year.

Forbes Columnist:
‘Who the Hell Cleared This?’

Their overall forecast calls for the 10-year Treasury to reach 2.14 percent by the end of the year, only about a quarter percentage point above its current rate.

The slow speed of rising rates may slowly deflate the bond bubble rather suddenly popping it. Noting the rising rates, Phil Orlando, chief equity market strategist at Federated Investors, said a potential bubble might have just "started leaking air," according to CNNMoney.

"There is a Treasury bubble that's been artificially inflated and will burst, but we don't expect to see a phenomenal blowup that will take the 10-year yield up to 5 percent for a couple of years," Orlando told CNNMoney.

Still, the experts are not urging investors to buy bonds.

"Even if rates stay low for a little while longer, bonds are a pretty lousy investment," Adrian Day, president of Adrian Day Asset Management, told CNNMoney. "Investors buying bond funds at this point are getting a very low return, with very little upside and lots of potential downside."

"I don't think average investors understand how much they stand to lose," said David Smith, chief investment officer at Rockland Trust.

The danger is that investors will dump their bonds when they think the Fed is about to stop buying bonds. That could prompt bond values to fall faster, and in turn lead to more redemptions.

"Once the snowball begins," Smith told CNNMoney, "we could see massive redemptions, and that will feed on itself."

The number of short positions against bonds is key to predicting a bubble, writes Karl Loomes, a market analyst at Astec Analytics, in a guest article for Forbes. Shorts could also be the pin that pops the bubble.

"An unexpected announcement by [Federal Reserve Chairman] Ben Bernanke, or even the European Central Bank or the U.K.’s [Monetary Policy Committee], could be the pin to prick the bubble," Loomes writes.

So far, he says, data do not indicate that a collapse of bond prices is imminent.

Forbes Columnist: ‘Who the Hell Cleared This?’

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