Fixed-income investments, a safe haven for investors since the financial crisis, could slam already battered buyers after a record year of gains, wealth management executives told Reuters.
Investors flooded into bonds and other fixed-income securities in the wake of the 2008 financial crisis, seeking a safe haven after the S&P 500 Index lost half its value between its peak October 2007 and the depths of March 2009.
But this has created its own bubble, executives said at the Reuters Wealth Management Summit.
"What's interesting is how overpriced some of the risk-minimizing assets have gotten," said Gordon Fowler, chief executive and chief investment officer for Glenmede, a Philadelphia-based wealth manager.
In January 2008, a 10-year Treasury note yielded 3.97 percent, while now it yields 2.59 percent, signaling that investors are willing to accept much lower returns on these instruments.
And since November 2008, junk bonds have risen more than 75 percent as measured by the Bank of America Merrill Lynch High Yield bond index, which accounts for both price changes and interest earned.
The top-selling mutual fund so far this year, Bill Gross' Pimco Total Return Fund, has collected a net $31 billion from investors through the end of September.
Fowler said investors' allocation of investments in cash and fixed income has increased from 35 percent to 50 percent, in some cases, since 2008. He noted that U.S. Treasury securities have become particularly overpriced.
The resulting spike in demand has created what some say could be the best market for fixed-income securities in nearly a decade.
"I think this will be the best year for fixed-income broadly since 2002," said Robert McCann, CEO of UBS Wealth Management Americas.
Despite the exuberance, wealth advisers have been pushing clients back into stocks and other equity investments, which some now see as less risky than fixed income.
"Many managers would say you might be taking more risk by staying so heavily engaged on the fixed side," said Jessica Bibliowicz, CEO of National Financial Partners Corp.
But executives said investors' wounds from the decline in markets during the financial crisis have left many skittish of jumping back into the equities markets.
"There doesn't seem to be a lot of evidence that there is overenthusiasm for equities," said George Lewis, group head of Royal Bank of Canada's wealth management unit. Lewis said his unit continues to heavily recommend equities investments to clients, but interest simply is not there.
Despite their desire to preserve their wealth, investors have not fully considered what may happen if surging fixed income investments dip in value, or yields drop as much as 1 percent on 20-year or 30-year bonds, typically considered some of the least risky investments.
"I don't think a lot of people are prepared for that," said Charles Johnston, president of Morgan Stanley Smith Barney, a joint venture between Morgan Stanley and Citigroup Inc.
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