In a special report, InvestmentNews displays a provocative cover on the state of the Bond Market, “Tick, Tick… Boom!” and asks the question “What will your clients’ portfolios look like WHEN the bond bomb goes off?” (Emphasis added)
Bond King, Gross restated Pimco’s “New Normal” advise: “The future for bonds is a lower-return future than investors have come to assume. Bond investors should be expecting 2% to 3% returns over the future years … bond returns will be lower than expected, but … still better than cash and will provide positive returns.”
In an article in Bloomberg BusinessWeek, titled “The Stock Market and the Economy’s Apparent Disconnect,” Peter Coy speaks to the “imbalance between the Dow and the economy … Bond yields are so low that savers who used to keep their money in, say, Treasurys are being driven into the stock market in search of positive returns. They have no choice.”
Economist David Rosenberg remarked: “If the economy slips into recession, even the Fed won’t be able to keep the market aloft. On the other hand, if the economy finally catches fire, investors will conclude that the Fed’s extreme unction will eventually be withdrawn. They’ll sell bonds in anticipation, driving up interest rates and possibly pushing down stocks.”
Looking ahead Rosenberg doesn’t like what he sees. He is concerned that no one else seems particularly worried and because the stock market has climbed so steadily and untroubled, no one seems troubled. “If there’s a bubble right now, it’s in complacency.”
The reason investors are complacent is, in the words of Harry Clark, chief executive of Clark Capital Management, “the public thinks bonds are safe, but they’re not … Bonds are a big problem, and most people don’t understand that yet.” After four years of being lulled into a false sense of security in bonds, “they have no idea what’s about to happen to them.”
When things do go south, many will say “Gee, we had no idea!” However, there are many, in fact more and more who are sounding the warning bell. The rest of us just need to listen and not tune them out.
“Buyer beware. There’s a big yellow sign saying, ‘Caution ahead.’ It’s not going to be pleasant when rates go up,” said David Sherman, president of Cohanzick Management.” No, not pleasant at all, if you consider a blow up in the bond market.