Could You Dodge A Bursting Bond Market Bubble?

Headlines about a bond market meltdown are catching fire all over the world. 

In the UK, The Telegraph recently reported British pensioners could face a 50 percent portfolio decline if there’s a bond market correction. 

Others, like David Roche president of Independent Strategy, suggested to CNBC that bonds are currently the most dangerous asset class to own.  Scott Burns agrees. 

When we hear about bond bubbles, what does that mean? 

Of course, the price of any asset (whether gold, stocks or bonds) is based on supply and demand.  And the demand for bonds is bubbly. It has pushed bond prices to multi-decade highs.

Read my full AssetBuilder article

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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15 Responses

  1. I'd just like to add that Canadian bonds have not experienced the bubbling that American bonds have.

  2. Scott says:

    So Andrew the question is what would you be doing if you were in the U.S. and have a large allocation of money in the Vanguard total bond fund?

    • Hi Scott,

      I think I would split it between the short term bond index and a money market fund. Normally, I wouldn't do such speculating, but this is a very unusual case.

      Cheers,

      Andrew

      • Derek says:

        Hi Andrew,

        Your comment that you would split your Bond Index to a 50% Short Term Bond Index fund/ 50% Money market fund, totally against your philosophy of rebalancing fund?

        Does this not say that you are trying to "speculate" on when a market is headed and the opposite of your investing philosophy?

        Thanks

        Derek

        • You're right Derek! To be honest, I've done nothing with my wife's Vanguard Target Retirement fund, leaving it to rebalance itself. You've caught me saying I would consider doing something, yet my actions haven't backed that up.

          Thanks!

  3. bongers says:

    experts have been predicting the demise of the US bond market for at least the last 4 years…I believe we are still going through a global deflationary cycle which can years to get out of… and as long as that is the case we will continue to have very low rates…just look at Japan's 10 year, trading at 50 basis points.

    • That's certainly possible Bongers. The yields may remain low, but I'm not concerned about that: it's the price appreciation of bonds that started roughly 3 years ago which worries me.

      Cheers,

      Andrew

  4. Barry says:

    Just reading this about the bond market and the bubble

    Interesting read if only for others views

    The Trigger Has Been Pulled And The Slaughter Of The Bonds Has begun

    http://beforeitsnews.com/alternative/2013/06/the-trigger-has-been-pulled-and-the-slaughter-of-the-bonds-has-begun-2693084.html

  5. Jonathan says:

    My Bonds PnL are all in red right now (as a buy and hold investment keeping the strategy of Bond Allocation using Bond ETF of A35, BND, and ISHG, where the sum total allocation is the same as my age) as per your Book “Millionaire Teacher”

    Is this strategy still good? Any advise on your followers of this blog and reader of your book “The Millionaire Teacher” who follows your advise?

    Instead of asking “Could You Dodge A Bursting Bond Market Bubble?”, I think a better question would be “How could you dodge a bursting bond market buble”.

    Hope to get insight from you Andrew

    • Hi Jonathan,

      I think you should embrace it. If you don’t have to sell your bonds (I’m assuming you aren’t retired) then you can capitalize on lower prices and buy more. Just keep your goal allocation aligned. It really is that easy.

  6. Scott says:

    Andrew,

    So looking at the Vanguard Total Bond Market Index fund it shows that it has been on a steady decline this past couple of months. I assume this is part of the correction you discussed in your article? Do you believe it has much more falling to do in order to get back to “normal” pricing?

    Scott

    • I would rather just keep a set allocation rather than speculate Scott. But have a look at the price: http://ca.finance.yahoo.com/q?s=vbmfx&ql=1

      Then see, in my article, where its regular range was 5, 7, 20 years ago. It’s still 10% higher. I’m not saying that it will drop. Perhaps it will end up with a new “norm” and for that reason, I wouldn’t want to speculate. Just stick to a long term allocation plan and you’ll be fine. If you own this index, and your percentage allocation has dropped, buy more. And if it falls further, buy even more.

  7. Mary says:

    Hi Andrew, Just finished reading your book, ready to take the plunge with proceeds from selling our house $480,000. We need to build a portfolio that will generate monthly income of $2000. to supplement our pension of $1200. per month. We are 56 and 57 and have no other income coming in. What to do with highly taxed assets like bonds if rrsp and tfsa are maxed out or does it matter since our income is so low? Really need help with tax efficiency but don’t know where to turn. Your opinion is greatly appreciated. Thanks, Mary.

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