Although bond markets are presenting possible warning sings of a bubble, the fact remains that investors want safety with some type of yield, however slight. Are bond exchange traded funds looking like the tech bubble of the ’90s?
According to Morgan Stanley, bond fever is bigger than stock market fever was during the dotcom bubble. Joe Weisenthal for Business Insider says that the bottom line is that investors are still hungry for Treasuries, particularly the slightly longer dated ones that still have some yield.
Darrell J. Canby for Metro West Daily News reports that when it comes to investing bubbles, you don’t know until the bubble is bursting. Bubbles are created when consumers buy so much of something that demand artificially pushes prices higher. When too many investors invest too much money and prices get unrealistically high, the bubble bursts and prices fall. Investors react by selling off, causing prices to fall further.
Some analysts are comparing the predicted bond bubble to the dot-com bubble, as some of the significant similarities include:
- The amount of money flowing into bond funds is close to the amount that flowed into stock funds during the dot-com bubble. For the two-year period ending June 30, 2010, bond funds attracted $480.2 billion, while stock funds attracted $496.9 billion in 1999 and 2000, according to Bloomberg and the Investment Company Institute.
- In both the dot-com bubble and today’s bond market, an over-enthusiastic rush by investors into the market has driven performance, but the level of demand is unsustainable. The big difference is that the dot-com bubble, like the housing bubble, was driven by overly optimistic investors. The bond bubble is being driven by overly pessimistic investors.
Phil Mulkins for Tulsa World reports that a bond investment is still a good opportunity for those seeking the yield with the shelter. Consider underweighting bonds that are ‘interest rate sensitive’ – treasuries, agencies and mortgage-backed securities. Investors needing income should consider investments not as interest rate sensitive such as ‘TIPS’ or Treasury Inflation Protected Securities, MLPs, preferred stocks, high-yield corporate bonds, or large cap stocks paying dividends.
Tisha Guerrero contributed to this article.