Bond prices have been rising since U.S. job growth hit a wall in June. Yields on government bonds are now back to where they were in March 2009, when fears of a 1930s style great depression were common. On Wednesday the 10-year Treasury yielded 2.6% Wednesday compared to 4% just four months ago.
On Wednesday Siegel wrote an op-ed in the Wall Street Journal warning that "those who are now crowding into bonds and bond funds are courting disaster and that if interest rates merely rise back to levels seen in April, recent buyers of 10-year Treasury bonds will face capital losses more than three times the size of the interest payments they stand to receive in a year.”
Professor Siegel isn’t the only one sending out such warning signals. I wrote earlier about Jim Grant and his suggestion that it makes no sense to invest in bonds at current yields when more attractive opportunities exist in dividend paying blue chips.
http://www.gurufocus.com/news.php?id=104083
Of course, sometimes spotting such bubbles isn’t the hard part. But rather predicting when they will end is. Siegel compares the flight to bonds with the technology stock bubble that burst a decade ago. The comparison he makes is government bonds trading with a 1% yield with Internet stocks trading at 100 times earnings. Siegel suggests that all it will take to pop the bond bubble is a sign that current economic fears are overdone.
One point to consider though is the Japanese phenomenon. Yields on Japanese government bonds are 1% on 10-year paper. And this has almost been the norm for Japan where yields on the 10 year haven’t been much higher than 2% since the early 1990s.
Siegel also notes “The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds totaled $232 billion while bond funds have seen a massive $559 billion of inflows…….We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic. “
On Wednesday Siegel wrote an op-ed in the Wall Street Journal warning that "those who are now crowding into bonds and bond funds are courting disaster and that if interest rates merely rise back to levels seen in April, recent buyers of 10-year Treasury bonds will face capital losses more than three times the size of the interest payments they stand to receive in a year.”
Professor Siegel isn’t the only one sending out such warning signals. I wrote earlier about Jim Grant and his suggestion that it makes no sense to invest in bonds at current yields when more attractive opportunities exist in dividend paying blue chips.
http://www.gurufocus.com/news.php?id=104083
Of course, sometimes spotting such bubbles isn’t the hard part. But rather predicting when they will end is. Siegel compares the flight to bonds with the technology stock bubble that burst a decade ago. The comparison he makes is government bonds trading with a 1% yield with Internet stocks trading at 100 times earnings. Siegel suggests that all it will take to pop the bond bubble is a sign that current economic fears are overdone.
One point to consider though is the Japanese phenomenon. Yields on Japanese government bonds are 1% on 10-year paper. And this has almost been the norm for Japan where yields on the 10 year haven’t been much higher than 2% since the early 1990s.
Siegel also notes “The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds totaled $232 billion while bond funds have seen a massive $559 billion of inflows…….We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic. “
