Bond Bubble: Can you beat the market?

Bond Bubble: Can you beat the market? (Jeff Kubina)

The bond bubble- is it real? Do you beat the market by selling or staying?

Since the collapse of the financial market in 2008, investors have avoided buying shares at all costs, resulting in an increase in the purchase of government bonds. 5 years later we’re looking at a situation where those bond yields are less than dividend yields. So what does this mean for bonds? Bankers and policy makers celebrated surging demand for financial assets last week but could we be seeing the burst of the bond bubble?

But will the burst happen? If so, when is it going to happen and can you sell in time to beat the burst? We know it can happen, it did in the US in 1979 and 1994. When bond prices crash, yields rise and when bond yields rise, so do dividends and other, riskier investments. It looks like we’re sitting on a volcano waiting to erupt.

What are the predictions?

Gary Cohn Goldman Sachs

President Gary Cohn warned of a potential drop in fixed-income prices as bankers and policy makers in Davos celebrated surging demand for financial assets. See the full speech on Bloomberg here.

Bank of America, Merrill Lynch

Index data backs up Cohn’s statement, showing yields on dollar-denominated junk bonds dropped to an unprecedented 6.46 percent on Jan. 22, and prices rose to 105.6 cents from as low as 54.8 cents in December 2008.

Ian Cowie The Telegraph

Ian tells us how he sold all his bonds in his company pension to buy shares.

Philip Milburn of Kames Capital

Milburn dismisses the bond bubble and says instead we should be worrying about emerging markets.

Andrew Wells Fidelity

Agreeing with Milburn is Fidelity’s Worldwide Chief investment officer, Andrew Wells, who believes the weak macroeconomic environment will hold and continue to support inflated prices.

Rumours of a bond bubble burst have been lingering for a few years now but is this something we need to seriously consider for the year ahead? Or something we can trust will continue to be stable. This will continue to pan out over the next year.

So what will you do? Stick to your guns/bonds? Or sell and invest in riskier business. Let us know your opinions in the comments below.

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