The bond bubble and the rush into TIPS
Treasury Inflation-Protected Securities (TIPS) are selling at more than 100 times their projected payouts, yet investors continue to pile into these and other Treasury bonds. Is this a bond bubble?
Jeremy Siegel and Jeremy Schwartz frame the story in a context that the investor class will truly understand - they compare it to the dot com bubble. I had front row seats for that show as a young stockbroker ten years ago and, like anyone else that was there, I have injuries so visceral that I can actually sense when rain is coming.
Of particular importance is their comparison of tech stocks then with TIPS now...
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.
The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.
The rush into TIPS has felt mind-boggling to me, in spite of the fact that this trade has "continued to work". With the Professor in agreement, I feel (only slightly) better about my reluctance to participate.
Meanwhile, The Boss has been making the media rounds talking about the bond bubble story all week, on MSNBC and Fast Money last night, on Bloomberg Radio this morning. This long-simmering story is finally getting some real attention.
Felix Salmon and Vince Fernando have had a highly important back-and-forth on what exactly the TIPS Spread is pricing in and Eddie Elfenbein picked up on the fact that JNJ was able to price a 10-year bond with a yield under 3% while it's common stock pays a 3.6% dividend yield.
The disgust for the growth prospects of equities is palpable as money flies out of stocks and piles into bonds of every stripe. Here's the WSJ on these inflow/outflow stats:
Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. 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.
I highly recommend that everyone reads the piece and is very aware of what their managers are doing for them on the income side. The TIPS Like Sugar rush may indeed end very badly.
The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.