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rd80 (94.66)

More New Records in the Bond Market

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February 06, 2012 – Comments (4)

Last week saw new record low corporate bond yields for 3-, 10- and 30-year maturities along with a record US $7 billion bond sale from an emerging market issuer.

One issue that got my attention was Praxair.  Part of the proceeds will be used for a share buyback.  Gutsy move to buy back shares with borrowed money and I plan on taking a closer look in the near future.

I continue to think bonds look bubbly, but have been early/wrong on the call so far.  The problem with calling bubbles is even if you eventually turn out to be right, the bubble can keep inflating for a long time.  Or, I could just be wrong.

What's your call on bonds in general?  Bubble or good deal?

Fool on!

Russ

4 Comments – Post Your Own

#1) On February 06, 2012 at 10:28 PM, outoffocus (22.89) wrote:

bubble

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#2) On February 06, 2012 at 11:18 PM, awallejr (35.30) wrote:

Only becomes a bubble if people are forced to sell.  Demographics is the key.  Older one gets the  less risk they take.  Hence stocks are reduced in one's portfolio and bonds are increased.  Retirees can't afford losses, and they won't lose with bonds as long as those bonds continue to pay.  The problem is the income generated is low in light of low interest rates.  Bernanke is forcing people to take higher risk but the retailer is not biting and I doubt will, not in light of the last few years.

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#3) On February 07, 2012 at 8:51 AM, rd80 (94.66) wrote:

Thanks for the comments. 

Woo hoo - we've got a CPA backing up the bubble opinion.:)

The problem is the income generated is low in light of low interest rates.

Exactly. 

A retiree or other investor who needs income is stuck with 2-3% on their traditional core investment -  long-term Ts and investment grade bonds.  They need more than that.  So, they move to dividend stocks and bid up those prices.

Treasury prices get pushed up by Fed policy.  With ZIRP, banks can borrow at the window, slide out the Treasury yield curve a bit, make a little money on the spread and put risk-free asssets on the balance sheet.  As Ts get bid up, corporates tag along.

In addition, I suspect a lot of folks look at the past year's winning mutual funds and put money in bond funds - which have done very well the past few years - without really understanding the interest rate risks.

I don't see this ending well - and I hope I'm wrong.

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#4) On February 11, 2012 at 3:47 AM, ikkyu2 (98.13) wrote:

I like the way Mark Notkin, the guy who runs the Fidelity Capital and Income hi-yield bond fund, put it:  "I see coupon-like returns from here on out."  

As soon as the Fed puts the brakes on - and they're going to have to, the current rate environment is distorting all kinds of markets - well, then bond prices and yields are going to have to start moving in opposite directions, like the disclaimer says they're supposed to.  That is going to kick the secondary market in all kinds of bonds right in the teeth.

So yeah, a bubble. 

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