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VIDEOTime to Short Bonds?
Money going into bonds will exceed what went into stocks during the Internet bubble. But those who shorted tech stocks in 1999 were mostly wiped out by 2000 and the same could happen to those shorting bonds here.
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According to Bloomberg, the amount of money going into bond funds will exceed the cash that went into stock funds during the Internet bubble. Bloomberg reports that $480.2 billion has gone into mutual funds that specialize in debt; during the Internet bubble, from 1999 to 2000, $496.9 billion flowed into equity funds. This kind of excitement is making investors fear the fixed-income markets are headed for a nasty drop.
Unlike tech stocks, which traded at crazy valuations, or homes, often bought by people with no documentation or stable income, investors are seeking safety in bonds over concerns in the economy. Currently the Fed will be keeping short-term interest rates near zero, there’s no inflation and over the past 10 years equities have had poor returns. US economic data have been extremely weak so investors seeking safety of government bonds are warranted.
In his nightly report to subscribers, Minyanville Professor Jon Markman points out that UK government bonds, or 10-year gilts, yield less than 3% while consumer inflation is at 3.1%. He interprets this to mean that investors in UK bonds are willing to earn negative inflation-adjusted returns to know that their money will be returned in 10 years.
Bond performance has been stellar this year, the Bank of America Merrill Lynch Global Bond Market Index, which tracks more than 19,100 bonds, has a market value of $37.6 trillion and is up 10.2% this year and 1.31% this month. The way for individual investors to play the bond craze is by using the iShares 20 Year T-Bond Fund (TLT) for a bullish bet or the Ultrashort 20 Year Treasury (TBT) for a bearish bet.
The bond market will one day correct itself. The tech bubble did as more than $6 trillion was wiped out when such companies as Broadcom (BRCM), Amazon (AMZN), and Yahoo (YHOO) came crashing down. However, there's no way to know exactly when the bubble will pop. Those who shorted tech stocks in 1999 were most likely wiped out by the year 2000. The same fate could happen to those trying to short bonds here.
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