Bond bubbles?

[bullrunner]

Dear folks

Would like to seek your opinion on the possibility of a bond bubble which have been forming over the last 2 years which look sets at reversing(according to experts). Even buffet himself is giving hints that investment in bonds may not be attractive as an option.

http://finance.fortune.cnn.com/2010/10/0...nd-bubble/

However what would be the impact of bursting of a bond bubble and how can investors take steps to profit from this scenerio which is likely to occur in the near future?

In the intelligent investor, there is a recommendation to overweight equities when the dividend yield of common stocks is substantially higher than the interest from 10 year bond yields which is happening in today markets. Does it apply after the market have recovered more than double from its historic low and the bull run is already in its 20month on th uptrend?

Does it mean when the bubble burst, money would flow out from debts into equity as investors? but the only logical reasn for such a flow of money is when the economic situation is looking well and risk premium for higher returns would drive such a movement.

we have experts who have been sharing warnings about a burst before the recovery. How should investors position themselves for the upcoming market situation?
http://www.youtube.com/watch?v=SFnCmq5uf...54C3B2D7E8

[sgd]

Just to give an idea of size in perspectives.

The size of worldwide bond market in 2009 est US$82trillion.

The size of US bond market US$31 trillion.

Daily trading volume $822 billion

The size of the all the stock market in the world is estimated 37 trillion.

I've read somewhere previously if bond market collapse everybody will be affected anybody with any investment in any stock market will be wiped out and taken to the cleaners.

all figures taken from wikipedia

[arthur]

The question to me is are we looking at:
1. Liquidity flowing from bonds back to equities?
2. Liquidity flowing from bonds to cash?

I would presume the second scenario more unlikely at current point in time. But I could be very wrong.

Cheers.

[refhounds]

The question to me is are we looking at:
1. Liquidity flowing from bonds back to equities?
2. Liquidity flowing from bonds to cash?

I would presume the second scenario more unlikely at current point in time. But I could be very wrong.

Cheers.

Feel liquidity will flow from bonds to equities.Other than David Rosenberg, almost all the value investors have moved to equities.

As GMO's Jeremy Grantham says, "the FED wants us to speculate"

[newborn1000]

A bit difficult for bonds to have bubbles..........who would take the bonds off you for twice the price?

Ans: Nobody, cause the interest will be so low and it will lose money, it's better to buy straight from the issuing government...........expensive maybe, but not bubbles......

[refhounds]

Of course bonds can have bubbles...

Nobody will buy bonds off you for twice the price

Bur Bond prices can crash by 50%+ or more

Witness the junk bond debacle in the US or the Greek/Dubai bond debacles.

It is possible we may witness such a sell off in the US Bond markets.If that happens, then in hindsight, the US bond market would look like a "bubble"

[mikh]

Am a non-bond person who got alarmed browsing this thread:
a. If any asset class is to suddenly collapse, it should surely mean a huge drop in value. In such situation, wouldn't that mean equity could collapse as well? ie. not so much where liquidity flows to, but value is lost. If its a "bubble burst", that would be sudden and therefore offer limited opportunity fleeing into cash or equity.
b. Based on given wiki numbers, global bond mkt size (2009) is > 2 times global stock mkt size. That could have tremendous impact on equity. However if the 37 trillion is for 2008 (i could not find the number in the wiki), we know that equity has increased substantially since.

Sub-prime all over again?! Junk bonds wiki has est value at USD146billion in 2003 (http://en.wikipedia.org/wiki/High-yield_debt). Doesn't seem so much now, phew.

Can the 'normal' bond market really burst suddenly or at all? Or perhaps it would merely deteriorate slowly? That could mean flowing to other classes as arthur says. Potentially how bad? Maybe refhound or others can comment?

[refhounds]

Am a non-bond person who got alarmed browsing this thread:
a. If any asset class is to suddenly collapse, it should surely mean a huge drop in value. In such situation, wouldn't that mean equity could collapse as well? ie. not so much where liquidity flows to, but value is lost. If its a "bubble burst", that would be sudden and therefore offer limited opportunity fleeing into cash or equity.
b. Based on given wiki numbers, global bond mkt size (2009) is > 2 times global stock mkt size. That could have tremendous impact on equity. However if the 37 trillion is for 2008 (i could not find the number in the wiki), we know that equity has increased substantially since.

Sub-prime all over again?! Junk bonds wiki has est value at USD146billion in 2003 (http://en.wikipedia.org/wiki/High-yield_debt). Doesn't seem so much now, phew.

Can the 'normal' bond market really burst suddenly or at all? Or perhaps it would merely deteriorate slowly? That could mean flowing to other classes as arthur says. Potentially how bad? Maybe refhound or others can comment?

Can "normal" bond markets burst suddenly?Well...history says yes.
They can burst just like equity markets.

News flow,black swan event etc can have a dramatic impact.
For instance, in the first week of Dec, US Treasuries suffered their biggest two-day sell-off since the collapse of Lehman Brothers.In the Oct'87 crash, when the US stock markets crashed, traders like Paul Tudor Jones made their money in the bond markets as the FED cut interest rates.

Can these events be predicted in advance?Unlikely.You have top gurus like Mark Faber,Bill Gross predicting the end of the US bond market for years and top gurus like David Rosenberg predicting the exact opposite.