Bond Market Bubble to Burst Sooner or Later

The current bubble in fixed-income markets is set to burst at some point, and will surely drive funds into stocks. The market for U.S. Treasury bonds has become inflated as banks exploit benchmark borrowing costs near zero to boost purchases.

Although moving into bonds is a natural reaction to uncertain economic conditions, income from the Treasury market is low and real interest rates are negative so investors should look elsewhere to get more bang for their buck, particularly high-yielding companies with good growth prospects.

The threat of deflation, quantitative easing, and liability-driven investments by global pensions is also driving bond prices higher. Moreover, some pensions are leveraging up on bonds to meet their actuarial returns. And banks are borrowing at zero on the short end, purchasing bonds to make the easy spread and trading in higher yielding risk assets all around the world.

With hopes of a V-shaped recovery fading, income-generating bonds look like a smart play. However, as Jeremy Siegel writes in an op-ed published recently in the Wall Street Journal, that “those who are now crowding into bonds and bond funds are courting disaster”.

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