There are phrases like “toxic assets” and “credit default swaps” and “government bailouts” that will always remind us of the financial crisis and the Great Recession. Also, “bubble,” as in “the housing bubble that popped and helped burst the stock market bubble.” Hate to be the bearer of bad news, but there is some worry about another bubble developing out there — in the bond market.
By Jeremy Hobson
Ever since the stock market collapsed back in 2008, investors have been throwing their money into government bonds and the safest corporate bonds. They might not be getting a big return, but at least they’re pretty confident they’ll get their money back.
Well, Bob Froehlich with Hartford Mutual Funds says we should call this what it is.
“The definition of a bubble is where does all the retail money go, and if you look at the last year, where all the retail money went, it all went to the bond funds,” said Froehlich.
Froehlich says the bubble could pop when the Fed does what it’ll have to do to stave off inflation — raise interest rates. He says when that happens, today’s bonds could lose 30 percent of their value if they’re resold on the secondary market.
“When interest rates go up, people will see the next level of bonds coming out,” said Froehlich. “They’re paying a higher interest rate, so no one is going to want to buy any of the bonds that are out there because they’re out there at a lower rate.”
But Diane Vazza, head of global fixed income research for Standard & Poor’s says she has a hard time “considering that a bubble.”
She says there can’t be a bubble in U.S. treasuries, because she says they’re risk free. The government is considered the borrower most likely to pay its debts. As for corporate bonds, she says investors know what they’re getting into.
“As their anxiety has increased during the past month, they’ve demanded more to invest in these companies,” she said. “So to the extent that they’re being well-paid for their risk, that alleviates some of the concern for this bubble.”
Or whatever you want to call it.
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