Wednesday, October 6, 2010

Beware of the Bond Bubble

/ USNews,

There's been a debate brewing in the markets about whether the treasury bond market is reaching valuations approaching a bubble, which could pop and create significant losses for investors. I believe treasury bonds are extremely overpriced, and that investors need to tread carefully in what's typically considered a "safe" investment. If you're not careful with the duration or maturity (how long before an issuer is required to pay back your principal) of treasury bonds you buy, you could end up losing money in them as interest rates climb.

Investors have been piling into bonds since the beginning of 2009. According to the Investment Company Institute, investors have added more than $215 billion to bond funds since the first of the year through the end of August--adding money at a time when interest rates are at historic lows.

To me, it looks like investors are engaging in the same behavior they did during the dot-com frenzy and the housing bubble--they're buying what has been hot in the recent past, instead of looking for what will be the best investment down the road. It's sort of like horse racing. Bettors at the track study a horse's handicap to guess whether it will win the race. But just because a horse has won in the past doesn't mean the horse will finish first in the next race. (more)

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