When is comes to diversifying and protecting your investment assets, one must devote a portion of their portfolio to income producing vehicles. This amount is determined by the investor’s time frame, as well as aversion to risk. For the last few years there has been much talk of a looming bond bubble. With interest rates so low, is this sustainable? If not, how much potential risk exists?
Investors have poured almost $400 billion into bond funds since the start of 2009. In aggregate there is more than $2.2 trillion invested in bond funds. Along with this, the federal government has purchased government bonds as part of its quantitative easing program. This may have only led to an exacerbation of the potential problem.
So, the question still remains. Are we in a bond bubble?
With bonds at, or close to all time low yields, there seems to be strong indication that we may at the top of the price range. Among some of the reasons may be:
The extreme monetary policy we are currently advocating will not be sustained indefinitely.
We have a very benign view of inflation currently. An incorrect assumption here would have devastating implications.
And last, bond prices will have to reflect the declining credit worthiness of the United States based on the deficit percentage of our current GDP.
How can we then avoid the potential problems if this current reasoning is sound?
First of all, it will most likely be a long and prolonged issue and not as violent as the bubble in equities. For this reason, the best protection would be to stay on the short end of the curve. Although returns may not be as high, the risk reward ratio would make this the most prudent action.
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Original article: http://topequitynews.com/when-will-the-bond-bubble-burst/
Disclosure: No position