Why Are Bond Investors So Complacent? (ETFs: AGG, IEF, LQD, SHY, TLT)

J.D. Steinhilber, founder of ETF newsletter and investment management firm Agile Investing, argues that US bonds (ETFs: AGG, IEF, LQD, SHY, TLT) are overpriced:

It is highly unlikely that this tightening cycle is over. A shift in Fed policy would be completely at odds with the current inflation backdrop and the Fed’s stated intention to curb excesses in the real estate and mortgage markets.

Bond investors have become complacent with respect to the risk of rising longer-term yields, because each time the 10-year Treasury yield has spiked to the 4.75% level over the past two years, it has quickly dropped back down. As a result, investors are not particularly worried about significantly higher yields, despite the fact that the 10-year Treasury yield has averaged 5.8% since 1990.

This complacency seems particularly misplaced at this time, given recent developments abroad and at home that threaten to upset the already tenuous supply/demand framework that underlies the U.S. bond market. At the same time that currency and economic reform in China and Japan – the two largest buyers of U.S. debt – is likely to cause demand for U.S. debt to diminish, our need for overseas financing is increasing due to government spending on reconstruction combined with a lack of domestic savings to absorb new government debt. The U.S. household savings rate just went negative for the first time since the early 1930s.

Related:

• Bond index ETFs include AGG, IEF, LQD, SHY, TIP and TLT. (Click on a symbol to view ETF Investor articles that discuss or mention that fund.)
• Other articles by JD Steinhilber.
• Other articles from The US Market Blog.

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