Bond prices have been rising steadily since the 2007 financial crisis. Many individuals, investors, companies, and institutions have been flocking to Treasury Bonds for their relative safety compared to other financial products. However, with the economy recovering more every day, and other securities, like stocks, starting to look more attractive, is the bond bubble finally going to pop?
Where We’re At
With the Federal Reserve setting the Fed Funds rate between 0% and 0.25%, and letting the world know they probably will do so until 2014, bond yields on just about every product have dropped to record lows. Essentially, bond buyers have accepted a risk premium that earns them zero return on their money in exchange for the guarantee that principal won’t be lost.
Just check out this chart of the 10 Year Treasury Rate since 1871:
As you can see, we are at historical lows. In fact, since 1871, the average yield on 10 year Treasury Bonds has hovered at 4.63% and a median value of 3.92%.
Conversely, you can see see how bond prices have performed. The best representation of this bond market I could find was the iShares Barclays 7-10 Year Treasury ETF. There are some shorter term notes in the mix, but it give a good representation of the pricing you will find for this type of bond:
Once again, you can see that the prices are at historical highs. Just six years ago, prices for the 10 Year Treasury ETF hovered around $82, and now they are past $105 consistently.
Where We’re Headed
The bottom line is that we have nowhere to go but down. It’s not going to be tomorrow, but in reality, the yields on these bonds can’t go down much further (and their corresponding prices can’t go up much higher). Continued bad news from Europe could shock the system a bit in the near future, but over the longer term (1-3 years), bond prices will fall and yields will start increasing.
Why Does This Matter?
If you’re looking to get a loan, now’s the time. However, if you’re looking for safety of your money, bonds are the right place for you right now. Yields will rise, and you will lose money as bond prices start to fall (unless you hold until maturity, but that is a different discussion of buying bonds versus bond funds).
So what should you do?
- If you want safety, keep your money in cash, or get a short-term CD
- If you really want bonds, build a diversified bond portfolio and include a wide variety of corporate and other bonds
- Start looking at stocks
- Get a loan and take advantage of the low interest rates responsibly
Do you think the bond bubble is going to pop? If so, when? If not, why?