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Warning: How the Bond Bubble Will Secretly Sabotage Your Retirement

By David Zeiler, Associate Editor, Money Morning • @DavidGZeiler - May 14, 2013

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Warning: How the Bond Bubble Will Secretly Sabotage Your Retirement

By David Zeiler, Associate Editor, Money Morning • @DavidGZeiler - May 14, 2013

A tool intended to make retirement investing easier may result in many Americans taking an unwitting hit to their portfolios when the bond bubble finally pops.

We're talking about target-date funds, designed to be "set it and forget it"-style retirement vehicles for people who don't want to bother with actively managing a portfolio.

Such funds usually include a combination of stocks and bonds, with the ratio dependent upon the investor's retirement date.

When retirement is 25 years or more in the future, target-date funds typically hold about 90% stocks and only 10% bonds. But as time goes on, target-date funds shift the balance more in favor of bonds, with the intent of reducing exposure to risk and volatility.

By the time retirement is 15 years away, the balance is 75% stocks and 25% bonds. And when that nears to just five years away, bonds generally rise to about 40% of the portfolio.

So as we edge closer and closer to higher interest rates and the negative impact that will have on bonds - the dreaded bond bubble - many workers approaching retirement are slowly adding more and more exposure to it.

What's more, many future retirees may not even know it.

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2013 Bond Market Forecast: Is the Bond Bubble Finally About to Burst?

By Shah Gilani, Capital Wave Strategist, Money Morning • @WallStreet_II - November 30, 2012

The Federal Reserve's multi-year prescription of targeting super-low interest rates on federal funds, along with various quantitative easing programs, has pushed yields down on all fixed-income instruments to the benefit of issuers and the detriment of investors.

There is little doubt that the Fed's articulated and executed policies have resulted in a bond-bubble with both short and long-term consequences for investors and the economy.

At some point the bond-bubble will burst. But there is no certainty on when that will happen or what ultimately will cause rates to rise.

What investors need to understand is that while yields and bond prices in 2013 could remain flat relative to closing third quarter 2012 measures, yields are unlikely to fall further and prices are unlikely to rally in 2013, with the possible exception of short-term U.S. treasuries.

However, there is the possibility of what I'm calling a "skyfall."

For fixed-income investors this means there is a chance the bond bubble may finally burst.

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Fed Meeting Today: Are You Ready for QE3?

By Guest Editorial, Money Morning - September 12, 2012

Investors have prepared for the Federal Open Market Committee (FOMC) meeting today and tomorrow to end with the announcement of a third round of quantitative easing (QE3) - and that's a good bet to make.

Today's Fed meeting will likely end with more of the same information we've been hearing for months from U.S. Federal Reserve Chairman Ben Bernanke. It's been a year and a half since Bernanke first announced that short-term interest rates would remain near zero "for an extended period." That language will likely stay the same tomorrow, and the policy timelines could be drawn out even longer.

There is also no doubt that QE3 or some other meaningful economic stimulus measure is on its way.

Maury Harris, an analyst with UBS, declared in a recent note to clients that, "We now anticipate an announcement of another round of quantitative easing at the FOMC meeting on September 13th. We expect the easing will take the form of a six-month program of at least $500 billion, primarily focused on Treasuries."

Harris also added that, "We also expect the FOMC extends their rate guidance into 2015."

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QE3 Risks: Why this Harvard Economist Fears More Stimulus

By Diane Alter, Contributing Writer, Money Morning - September 5, 2012

High U.S. unemployment and slowing economic growth have stoked hopes of a third round of quantitative easing, or QE3, from the U.S. Federal Reserve. Fed Chairman Ben Bernanke hinted that more was on the way - although failed to indicate when - in a speech Friday at the Jackson Hole, WY, economic symposium.

Bernanke repeated the Fed's recent stance that current economic conditions are still "obviously far from satisfactory" and more help would be coming "as needed."

Interest rates remain near zero, but the Fed maintains that it still has plenty of ammo in its arsenal to boost the economy. The Fed apparently doesn't want to do too little now while the economy faces high unemployment and some inflationary pressure.

On the other hand, doing too much could - if Fed policies interfere with Congress' ability to act down the road -lead to a backlash against the Fed's power.

And the farther the Fed goes with monetary stimulus measures, the deeper that problem becomes.

That's why Harvard economist Martin Feldstein is afraid of QE3. He thinks adding to the billions of dollars already committed to quantitative easing programs will hurt us more than it helps.

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Four Ways to Play the Bond Market Bubble

By Keith Fitz-Gerald, Chief Investment Strategist, Money Map Report • @kfgtotalwealth - September 30, 2011

To hear the "bond bubbleistas" tell it, the bond market is poised to collapse the second interest rates start to rise.

But if you're thinking about dumping all of your bonds, you should think again.

Yes, rates will rise - but not as fast as many analysts are forecasting. What's more, even if rates do increase, the price risk is not as bad as you might think.

That's why the more appropriate strategy is to simply reorient your bond portfolio, rather than pull out all together.

Don't get me wrong. I'm not trying to make light of the global financial crisis or our current situation, but people have been calling for an "end" to bond markets, in one form or another, for quite a long time.

Failed Forecasts

PIMCO cofounder and fund manager Bill Gross has actually done so twice, most recently dumping all government bonds in early 2011. He's since admitted he was wrong and piled back in. Granted, his business is bonds so he had to, but the point is moot.

PIMCO investors paid through the nose in lost performance, though. The PIMCO Total Return Fund was up just 3.2% as of August, trailing more than 70% of its peers and lagging the 5.6% return of its benchmark index, according to Bloomberg.

Meredith Whitney famously called for the $3 trillion muni-market Armageddon in November 2010. Her clock is about up and she's mentioning nothing about her prediction in recent appearances despite turning the bond markets upside down for months.

Even economist Nouriel Roubini has eaten crow when it comes to bonds. He called for the complete meltdown of everything we knew to be true in 2004, 2005, 2006, and 2007. And while he's since become a media darling, his predictive record is less than stunning. Journalist Charles Gasparino, who investigated Roubini's track record, noted that he couldn't find a "single investor who regularly uses his research."

My point is not that any of these incredibly smart people were wrong - everybody is wrong from time to time - just that investors risk a lot by not "risking" anything.

Let me explain.

No Substitute for Stability

Fueled by banking blunders and the European banking crisis, U.S. Treasuries have not only risen this year, they've rocketed so high that in August the benchmark 10-year yield dropped below 2% for the first time since 1950 and traded at around 1.96% yesterday (Thursday).

That means investors who hung in there despite the risks and the hype have enjoyed a nice return from bond appreciation even as they continued to reap the benefits of the yield those bonds kicked off. Those who bailed out did so prematurely and got left behind.

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