Bonds have been outperforming stocks for the past 30 years, but that’s about to change, warn experts. Bonds are not the safe haven that they used to be. Interest rates have been declining since the early 1980s but now we’re heading into a period of rising rates, which means that investing in the bond market will be a lot more challenging over the next few years.
Investors with stakes in long-term Treasuries are already feeling the pain. As the 10-year Treasury yield recently crept up to 2% from its record low of 1.4% last July. If the 10-year yield rises back to the level it was before the financial crisis (around 5%), bond funds could plunge 25. The threat of rising yields is especially worrisome for individual investors, who have poured more than $1 trillion into bond funds in the aftermath of the financial crisis, according to the Investment Company Institute. That trillion-dollar inflow has led to an overcrowded market. They’re invested in bonds for their perceived safety, so they’ll likely be extra sensitive to the price moves.
The risk is even more alarming when you consider valuations adding that the bond market looks similar to the overvaluation of the stock market at the height of the dotcom bubble, when the S&P 500 was trading at 30 times trailing earnings.
In my opinion its not a matter of what Bernanke specifically will say, but more a underlying fundamental result that will turn this 30 year bull market into negative territory. Sooner or later those interest have to come up from their artificial rates that have been kept low for helping the “recovering” of the economy.
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Sven Van Tongeren
Sven@KeeneOnTheMarket.com