A Bubble in the Bond Market?
The bond market is a bubble about to burst, investor Jim Rogers told CNBC on Thursday. Rogers also said he sees rising inflation in this country right now – anyone who shops sees it, he says. He says some governments – notably the U.S. and the U.K. – are “lying” about inflation for political reasons, because signs of inflation would make the massive government stimulus and bailout spending (bailing out Fannie and Freddie alone is expected to cost $1 trillion) seem unwise. Other countries – Rogers identifies Australia, China and Norway – acknowledge the existence of inflation and are tightening their monetary policies to fight it.
Rogers’ views, on the bond market at least, are echoed by others. In Thursday’s Wall Street Journal article, “Bond-Market Run? It’s Done,” Mark Gongloff reported that investors’ money is flowing away from corporate bonds and into U.S. Treasuries as a safe-haven. Sovereign debt worries in Europe have reportedly caused bond investors to demand higher yields, thus pushing bond process lower for both European nations and U.S. corporations.
There are clear warning signs of bond market stress. The average cost of a credit default swap on an investment-grade corporate bond issuer jumped 39% last quarter to its highest level since last summer, according to the article. This is a barometer of investor concerns about the likelihood of high-quality corporations defaulting on their bonds.
In addition, the three-month LIBOR (London interbank offered rate at which banks make short term loans to each other) rose to more than 0.5%, the highest it has been since last summer.
This has caused a flood of money into U.S. Treasury bonds, driving up T-bond prices, which returned 4.7% in the quarter, outpacing stocks and corporate bonds, and lowering the yield, despite a flood of new supply. More than $300 billion in Treasury bonds was issued last quarter, and $1.3 trillion more is expected to be issued by year-end.
It is in environments like this that some brokers and brokerage firms recommend complex structured products promising both safety and better than average yield. Investors should be skeptical of such promises and products, which are driven by options that do not behave in ways that are intuitive to most investors. Brokers should not sell a product they do not understand well enough to explain clearly how it is priced, what risks exist and why it is a good investment.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing investors that lost money in bonds and structured products. For further information, please contact us.
