Is The Next Bubble The Bond Market?

In the 90’s we had the “tech” bubble and in the 2000’s we had the “real estate” bubble. Going forward, is there another bubble investors should be concerned about? We believe a bubble could be forming in the bond market. A bubble occurs when money rushes to a sector of the economy and that sector is bought at any price. There have been unbelievable flows into bonds over the past year and a half. On a weekly basis, average inflows into bond funds are in the range of $6-8 billion per week. However, many do not realize the low yields they are getting on bond funds. Just last week, Procter & Gamble two-year bonds were trading with an annual yield of 0.65%. IBM was able to issue a three-year note with an annual yield of 1.0%. What is interesting is that bank CD’s offer a higher yield. So why on earth would an investor buy these bond funds over a bank CD that is fully backed by the Federal Government? It is a function of supply and demand and irrational behavior. We are seeing more and more money going into bonds/bond funds and bidding up prices beyond what they should be “normally.” The dividend yield on a share of P&G stock is currently 3.21% (and, at least this year, is taxed at a lower rate than bond interest) compared to the 0.65% yield on the P&G bond. This is the complete opposite relationship that was in place in 2007. In our opinion, bonds are not currently a rational investment. This is a clear sign of a bubble.

Sincerely,

Your THOR Team