Tags: bond | bubble | burst | survey

CNNMoney Poll: Bond Bubble About to Burst

Sunday, 06 Jan 2013 03:22 PM

By Michael Kling

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The bond bubble may be about to burst, according to a new CNNMoney survey.

Almost 40 percent of the 32 financial experts participating in the survey predict interest rates will start rising in 2013, while 30 percent think they'll start rising in 2014.

"Like it's been in the case of Japan, low interest rates can go on much longer than expected, but right now it seems that all the stars are aligned for interest rates to rise," Jeff Weniger, an analyst at BMO Private Bank, told CNNMoney.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

"But ultimately, whether it happens in 2013, 2014 or 2015 doesn't matter too much. What matters is that you're not invested in bonds when they do rise."

That's because the value of bonds falls when interest rates rise.

Investors should especially avoid long-term bonds and instead opt for short-term or floating-rate bonds, experts advise.

Spooked by volatile stock markets since the 2008 financial crisis, investors have moved more money into bonds. The research firm EPFR Global reports that investors sent over $90 billion into bonds and withdrew over $150 billion from stocks in last year alone, according to CNNMoney.

Some experts say rates won't start increasing until 2015 or even later. The Federal Reserve has said it will keep interest rates low until the unemployment rate falls to 6.5 percent, and doesn't expect that to happen before 2015.

However, Fitch Ratings warned about a potential bubble in U.S. corporate bonds in a recent study.

In one Fitch scenario, a typical 10-year investment-grade corporate bond may lose 15 percent of its market value if interest rates rose 2 percent to early-2011 levels, while a 30-year bond could lose 25 percent of its value.

"The timing, pace and magnitude of future rate increases is critical to how these risks play out," Fitch stated in a press release.

The Fed will probably keep rates low for the next several years, but continuing low rates could exacerbate ultimate risks because over time a larger share of portfolios would consist of lower-coupon securities, according to Fitch.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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