Bond, Low Bond (yield)

Bonds have been going a bit batty, to say the least. It’s a bit of doom and gloom being predicted by analysts and experts, and it seems to be as if at least some of those predictions are true as bonds have tumbled to 2.54% from its level of 2.99% three weeks earlier. This was mirrored by a similar plunge in bonds issued by other major governments all over the world as ten year bonds issued by Japan, Germany and the UK offered reduced yields as compared to previous levels.

It’s almost as if everything has gone a bit mental of late as corporate bonds have started to fly high and everyone is cashing in. Of late, tech giant IBM has sold off $1.5 billion worth of three years bonds that had a yield as low as 1%; and it flew off the shelves (so to speak) like hotcakes! It is almost a bemused sense of fascination with which onlookers are taking in this flight of money to and fro. An outpouring of cash (no matter which asset class it is surging into) happens to run a very predictable course as prices first start to inflate before luring new buyers that want to hop onto the bandwagon. It is a long drawn out process that goes on and on until the bubble bursts and prices tail off, sending investors scurrying for the exits while screaming in horror.

This can be seen in the way the tech bubble and the real estate bubble burst over the last decade and the latter was so bad as to send shockwaves throughout the world. If historical performance is any indicator of future performance, the bond markets might just be in for a very nasty shock sooner or later. Chasing lower yields is a bit of a wild goose chase at times that can end badly, although it won’t quite be the bloodbath the financial crisis was. If an economic compass did exist, its needle would be spinning wildly right now, trying to make sense of all the chaos that exists. A high flying bond market is the government’s determined response to the weak economic situation and if you do believe there’s a sucker born every minute, you might well be right if the bond market is taken to the cleaners.

It is, however, unlikely that this will happen in the short run. If the American example is taken, there is a strong commitment from Bernanke and the Federal Reserve to prop up the economy and rebuild a failed institution and for this reason low bond yields could be the permanent thing rather than something more ephemeral.