Tuesday, February 1, 2011

What to do before the bond bubble bursts

The past two years have seen the biggest boom in bond investing on record. Investors, fleeing the ravaged stock market, have poured hundreds of billions of dollars into the presumed safety of bond funds.

From January 2009, we saw 22 consecutive months of inflows into bond funds, according to the Investment Company Institute, an astonishing $643.4 billion in all.

But starting in November, nervous investors began to pull money from bonds — mostly municipals, amid fears about state and local governments’ finances. Outflows from munis have persisted into January, but money has continued to trickle into corporate bonds, the mainstay of the 2009-2010 bond boom.

And now many investors who’ve just made a big bet on fixed income are worried about getting caught on the wrong side of the trade yet again.

The rumblings apparently got loud enough that Gus Sauter, chief investment officer of The Vanguard Group, the largest U.S. bond mutual fund manager with $413.6 billion of fixed income assets as of Dec. 31, posted a cautionary message on the company’s website.

“I’m increasingly worried that people aren’t aware of the risks in the bond market,” he wrote. “The problem is that when you’re at historically low rates, as we are now … yields aren’t likely to go significantly lower, and at some point when the economy does strengthen, they’re likely to push higher.” (more)

No comments:

Post a Comment