Are We Headed for a Bond Bubble

According to an article by Tim Grant with the Pittsburgh Post-Gazette, there are an increasing number of financial experts who feel that there might be a bond bubble as devastating as the tech wreck and the real estate crash. Record low interest rates and record high demand for bonds could be the ingredients for a perfect storm. One of the concerns is the sheer volume of money going into bond funds, much like the flow of money into equities during the technology bubble. The retired, elderly and the baby boomers would likely be the hardest hit, since they are the targets of firms marketing bonds. As is always the case, the firms and the advisors have added incentive to push the more risky or lower quality bonds with longer maturities. Compensation is markedly higher for selling lower quality junk bonds with a 25 year maturity, as compared to government or investment grade bonds. Unfortunately, when interest rates rise, the investment holdings for many who felt they were in safe investments will be wiped out.

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