Investors seeking safety flock to bonds, but experts warn of hidden risks
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Bonds are increasingly popular with investors who want to stay out of harm's way when it comes to keeping their money safe and secure -- but safety has come with a cost.
With so many investors stampeding into the bond market, a growing number of financial experts have begun to suspect there is a bond bubble that could be just as devastating as the tech wreck and the real estate crash.
If that were to happen, the effects would be felt most keenly by those who tend to favor bonds -- retirees and conservative investors.
One ominous sign of history repeating itself is the sheer volume of money flowing into bond funds in recent years that is not unlike the money that was poured into stock funds during the height of the technology stock bubble.
In 1999 and 2000, stock funds attracted $496.9 billion in investor capital. For the two-year period ended June 30, 2010, bond funds have attracted $480.2 billion, according to data compiled by Bloomberg and Washington-based Investment Company Institute.
"In the last 12 months, there have been auctions for short-term U.S. Treasury bonds where the yield was zero and people still bought them because it was a safe investment," said Harvey Rowen, CEO of Starmont Asset Management in San Francisco. When bond prices are high, bond yields are low.
Record high demand for bonds at a time of historic low interest rates could add up to a perfect storm.
Interest rates are not likely to stay this low forever, and when they do start to rise, the value of existing bonds will fall dramatically because investors will be more inclined to buy newer bonds paying higher yields.
"It's going to be pretty ugly. In a lot of ways it will be worse than 2008," said Matthew Tuttle, author of "How Harvard and Yale Beat the Market."
"When you buy stocks, you know you are taking a risk. A lot of people flowed into bonds to be safe, and they will be surprised at how their 'safe' government Treasuries can lose 10, 15 or 20 percent. It could even be worse."
First Published October 29, 2010 7:33 am
