Blowing Bubbles

During the final months of 2012, the talk of a “bubble” in the bond market grew to a loud chant, and now, nearly five years later, little has changed. Following a 35 year bull market in treasuries, the number of commentators proclaiming that bonds are "a bubble set to burst" is as loud as ever. Former Fed Chairman Alan Greenspan made this statement just this morning. Interestingly, exactly two years ago he said the same thing, that there was a bubble and rates would move quickly higher, which didn't happen. At least this time, he did add this to his proclamation, "I have no time frame on the forecast."

The problem with these "proclamations or predictions", is they have a tendency to generalize the bond market. This overgeneralization would be like someone yelling from a car lot, "used cars are terrible," Certainly if there were 500 used cars on the lot, some would not run well, most would be just fine, and some even great deals. Likewise, in the bond market, an interest rate bubble will affect some bonds greatly, and others, not at all. This is why it's as important as ever for individuals to have competent investment advice.

At Windsor, we agree that using the definition of "bubble" could certainly apply to long-term treasuries. This is the key point. Bond bubble predictions are referring to bonds that are most sensitive to interest rate moves, and long-term treasuries are at the top of that list. For several years our strategy with corporates and municipal bonds have been to keep maturities and overall duration fairly short. Our clients will benefit much faster than those in long duration portfolios. As short-term bonds come due, tendered, or called, we look forward to reinvesting in higher returning bonds as interest rates move higher.

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