5 Ominous Signs the Bond Bubble Is Breaking

Despite their calm words , bond managers can't be sleeping well—what with their worries about interest rates and inflation, the housing market and municipal bankruptcies keeping them up at night.

So just when will this bond bubble burst? Treasurys are as expensive as they've ever been; bond king Bill Gross, manager of Pimco Total Return, the world's biggest bond fund, called the end of the 30-year rally in bonds way back in October; and the Federal Reserve's program to snap up Treasurys in hopes of reviving the economy could end in June without further government action. And still nothing catastrophic has happened. But smart financial advisers and fund managers are diligently watching for signals that the end is near and so should you. Ironically, good economic news--such as an improved housing market or increased consumer spending--could be disastrous for your bond portfolio. Here then are five key signs too look for that could signal the bond market is taking a turn for the worse.

1. A rise in interest rates.

Let's face it: Interest rates can't get much lower after falling steadily for the past three decades, so a hike is coming sooner or later--and that's bad news for bonds, especially Treasurys. If employment and consumer spending improve, the Federal Reserve is likely to lift interest rates to control inflation, says Greg McBride, a senior financial analyst at Bankrate.com. Higher rates could decrease the value of existing bonds because investors would likely flock to newer issues with higher yields. (more)