The global bond market has generally been on a joy ride since the world’s major central banks went on a bond-buying binge to bolster economic growth after the 2008 financial crisis.
Bond prices, from sovereign debt to junk bonds, have generally risen as yields have fallen.
In the US, investors keep plowing money into US bond funds, betting the fixed income party will continue on into 2017.
The iShares 20+ Year Treasury Bond ETF (TLT) is up 15.4% on the year through October 3, according to data compiled by Bloomberg.
Bond Bulls
Now, some pretty august financial pros are sounding the alarm.
Among those who see trouble ahead are former Fed Chairman Alan Greenspan, BlackRock’s Global Chief Investment Strategist Richard Turnhill and Paul Singer of Elliott Management.
Bond bulls argue that sluggish global growth means central banks will be slow to raise interest rates, usually a negative development for bond prices.
On top of that, even with US interest rates at historic lows, Treasuries offer higher yields than many foreign bonds.
The aging of US savers will also support demand for bonds as well in the years ahead, the bulls argue.
Bond Bears
The flip side of the argument is that the Fed is definitely on track to raise rates over the next year.
And for Greenspan, that means the long-running bond bull market is destined to hit a wall at some point.
In a recent television interview, Greenspan saw a big disconnect between paltry yields investors are getting relative to bond prices.
There’s also a risk that interest rates could head back to their historical average of 4% to 5% faster than investors anticipate.
Bond Fatigue
Also, there are signs that the central bank bond buying spree may have run its course. The Bank of Japan is running out of bonds to buy in the Japanese debt market.
The European Central Bank, meanwhile, roiled the bond market recently after signaling it wouldn’t pursue further stimulus.
Despite such setbacks, investors keep pouring cash into bond funds pushing prices to ever-higher levels.
Elliott’s Management’s Singer recently told CNBC that we’re witnessing, “the biggest bond bubble in world history.”
Takeaway
Fitch Ratings recently ran some numbers on the risk global bond investors may face.
If bond yields suddenly returned to 2011 levels, some $3.8 trillion value would be wiped out in the investment-grade sovereign debt market.
That may seem like a long-term risk, what with 10-year Treasuries yielding about 1.6% and longer-dated Japanese and German bonds actually in negative territory.
Yet it’s a risk worth watching, in my view.
Photo Credit: Odd Iver Jacobsen via Flickr Creative Commons
