Downplaying Fears of a Bond Bubble Bursting

Written by Mitch Conlon | 20 December 2012

A lasting imprint of the 2008 financial crisis is the enormous popularity of bonds, largely at the expense of stocks. Despite measly yields, the appetite for bonds has not wavered – investors poured $300 billion into bond funds in 2012 alone.

With that backdrop, we’ve noticed more talk of a looming bursting of the “bond bubble.” We encourage clients to be mindful of bond market risks, but remind them, too, that sitting on cash in fear of an all-out bursting is counter-productive.

Roger Young, a fixed-income analyst at Fidelity Investments, has a similar view. Young makes a well-reasoned case for investors to maintain a strategic allocation to fixed-income in Bond bubble ready to burst? Not so fast.

For the bond market to burst, Young suggest that four events would need to take place:

• The economy would have to improve drastically
• The fed would have to stop its quantitative easing
• Demand for government debt would have to decline
• The U.S. would need to take a step down from its “safe haven” status

Young makes the case that the likelihood of any of these events happening in lock step is remote. He further argues that even if they did, interest rates would not rise so quickly to create a devastating “bursting” effect.

Bond bubble or not, Young’s article is an excellent primer on the workings of the bond market.

Chaining the CPI

Written by Stephen Dart | 13 December 2012

Negotiations over the fiscal cliff, the austerity crisis, the same-old-same-old-whatever-you-want-to-call-it, keep dragging on in Washington D.C.

Perhaps you’ve read some politicians’ lists of demands. They all seem to have a version of; “This is what we want, and if we don’t get it, we are willing to see taxes skyrocket and spending slashed. Just try us! Oh, and I’m only doing this because I love my country so much.”

Sigh.

Now, we mere citizens are not privy to the negotiation play-by-plays. Still, this all seems so repetitively sclerotic.

There are some ideas that could appeal to both sides and break the logjam. Derek Thompson at the Atlantic website has one. It’s an idea that has been kicked around for a while and might start showing up in some news reports.

If you haven’t had your fill of such stories, check it out.

The Wrath of the Great Recession: A Look Back

Written by Mitch Conlon | 06 December 2012

It’s not breaking news that the average American family was financially slammed in the last recession. But this statistic may give you pause: adjusted for inflation, median household net worth in the US fell by 47% between 2007-2010, reaching its lowest level in more than forty years.

This and more revealing data were published by Edward Wolf, a New York University economist, and summarized nicely in the Atlantic’s The Recession’s Toll: How Middle Class Wealth Collapsed to a 40-Year Low.

Wolf argues the middle class suffered disproportionately, largely because their net worth was tied to their homes, which were punished more than any other asset during the financial crisis. According to Wolf, the middle 60% of Americans had 66.6% of their net worth tied up in their home at the end of 2010, compared to 9.4% for the top 1% of households.

On a positive note, Americans have begun to recover from the forty year low sited earlier. Since 2010, a modest rebound in housing and a sustained rally in both stocks and bonds have begun to heal the damaged balance sheet of America’s shrinking middle class.