A record number of assets is expected to continue flowing into bonds and related exchange traded funds (ETFs) this summer, renewing fears that there’s a bubble in this market.
A projected $380 billion will pour into bond funds this year, more than went into domestic stock funds in the past decade. That’s on top of a record $376 billion last year, reports Paul Lim for CNN Money. Fear and uncertainty in the markets could continue to send investors to bond funds, putting trillions at risk when interest rates rise.
Here are some cold, hard facts:
- Over the past decade, holding bonds was considerably safer than holding stocks. After the tech bubble burst in 2000 and equities lost almost half their value over the next three years, corporate bonds surged nearly 50%.
- Many baby boomers who have stampeded into bond funds did so in reaction to their stock losses since the financial crisis began in 2008. [Market Concerns Push T-Bills Higher.]
- A true bear market in bonds is not anything that has truly been experienced. Many interest rates have remained quite low, compared to the ’80s, which saw rates as high as 15%.
- It’s true that bonds are less volatile than stocks. But they do lose money as often as equities do.
Why could a bubble burst? There are a number of factors that can contribute to this scenario: the return of inflation, rising interest rates, doubts about an economic recovery, and panic selling. Long-term bonds are expected to be hit the hardest if rates rise. You can protect yourself by utilizing a simple strategy. The one we use is trend following, which involves the 200-day moving average. [How to Follow Trends.]
For more stories about bonds, visit our bond category.
- Vanguard Extended Duration ETF (NYSEArca: EDV)
- iShares Barclays 20-Year Treasury Bond Fund (NYSEArca: TLT)
- PowerShares 1-30 Laddered Treasuries Portfolio (NYSEArca: PLW)
- iShares Barclays 10-20 Year Treasury Bond (NYSEArca: TLH)
- iShares Barclayss 7-10Year Treasury (NYSEArca: IEF)
- Vanguard Long-Term Bond (NYSEArca: BLV)
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.