Is A Bound Bubble On The Horizon?

Record low interest rates and record high demand for bonds could be the ingredients for a perfect storm. According to an article in the Pittsburgh Post-Gazette, there are an increasing number of financial experts who feel that there might be a bond bubble as devastating as the tech wreck and the real estate crash. One of the concerns is the sheer volume of money which has gone into bond funds, very similar to the flow of money into equities during the technology bubble. Unfortunately, those least able to afford the losses like the retired, elderly and the baby boomers would likely be the hardest hit, since they are the major targets of firms marketing bonds. As is always the case, the brokers and their firms have extra incentives to push the more risky or lower quality bonds with longer maturities. Compensation is markedly higher for selling lower quality junk bonds with a 25 year maturity, as compared to government or investment grade bonds. Unfortunately, when interest rates rise, the investment holdings for many who felt they had safe investments will be wiped out.

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