Bond Bubbles?





You tell me:

Source: Federal Reserve, author's calculations.

Source: Federal Reserve, author's calculations.

Of course, this chart tells you nothing as to whether bonds are overvalued. I happen to think they are, but this chart won't tell you.

What it shows, though, is important: Investors are plowing into bonds with abandon. Keep in mind, this chart only depicts wholly owned Treasuries. Not corporate bonds. Not bond funds. Not bond exchange-traded funds. Just Treasuries. (That, by the way, is likely why the current level isn't much higher than those reached in the mid-'90s. We now have many different bond-investment vehicles to choose from that didn't exist 15 years ago. And owning whole Treasuries is probably the most cumbersome.)

There's only one way to accurately describe what this chart shows: flight to safety. Which is understandable; people are scared. But what does it mean for asset prices? I can't realistically see how the stampede into bonds will end anyway but badly.

Examples of the bubble really get nasty when you look at the corporate debt world. Microsoft (Nasdaq: MSFT  ) just issued three-year debt at a record-low 0.875%. IBM (NYSE: IBM  ) isn't too far behind, issuing three-year notes at 1%. Johnson & Johnson (NYSE: JNJ  ) issued 10-year notes at under 3%. With companies taking maximum advantage of these low rates, I'd much rather own their stocks than low-yielding 10-year Treasuries. If a historical example with a happy ending exists of investors running headlong into an asset class on the basis of fear and panic, I'd love to hear of it. 

What do you think? Are Treasury bonds a bubble right now? Take the poll below and let us know.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Morgan Housel owns shares of Microsoft and Johnson & Johnson. Microsoft is a Motley Fool Inside Value selection. Johnson & Johnson is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended diagonal call positions on Johnson & Johnson and Microsoft. The Fool owns shares of IBM, Johnson & Johnson, and Microsoft. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2010, at 10:09 PM, rd80 wrote:

    The only argument I see for the 'not a bubble' side is most of the people in your poll agree that bonds are in a bubble.

  • Report this Comment On September 24, 2010, at 12:05 PM, fennecfoxen wrote:

    I don't think bonds are really in a traditional bubble. The dot-com era was a bubble - people poured money in, because stocks were hot, and you could make sooo much money, then.... *splat*. worthless. Same for the real estate bubble that followed.

    Bonds? People aren't pouring money into bonds for the same reason. No one's trying to make a quick buck. They're pouring money into bonds as a last resort, when they're scared away from other assets.

    So. Are bonds overpriced? Sure! Should you buy lots? I doubt it. Are people going to lose money on them? Probably! Is that loss going to look anything like the dot-com bust or the housing market bubble pop? I don't think so.

    (Myself, I'm holding onto some intermediate term corporate bond funds, for diversification. I own pleeenty of stock.)

  • Report this Comment On September 24, 2010, at 12:58 PM, lazytype wrote:

    LOL, so funny. It's always John Doe (and mr Zhang) who pays for bubbles. Now he owns bonds, it so obvious he's not the one to earn in a system ruled by bankers:) Short $ .

    And the buzzword for 2011 is INFLATION. bye bye

  • Report this Comment On September 28, 2010, at 6:02 AM, thenemo1 wrote:

    To all the rocket scientists!

    If you're say 50yrs old & you already lost money in the last bust and the dot com bust before that you might just want income and keep saving and reinvesting as rates evolve over the next few years. Those who go in for a killing sometimes gets killed. When you want to sleep at night and get that income, you know you can believe in compound interest yeah! Then when rates reach a acceptable level to you do your thing. Lock it in!

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