Are we close to a tipping point?

edited January 2013 in General Bond Discussion
Many commentators have indicated that bond prices are too high and almost qualify for being in a bubble. Most agree that when interest rates rise, then bond and gilt prices could fall dramatically. However the market often senses events before they happen and the well informed bail out of things before they are forced too.

So what are the signs of a tipping point coming?

An old tale about a sign of a tipping point coming is that when a taxi cab driver tells you it is time to invest in something it is time to get out of it.

Journalists tend to be full of speculation of horrors to come. I don't tend to take too much notice until either they all start saying the same thing, or there is evidence that journalists themselves are acting on what they write about.

This last weekend a journalist in the Telegraph stated that he had sold his bonds, which he had held for a long time, and was now investing in equities. I also have a sense of more column inches being devoted to imminently falling gilt/bond prices

Are we close to the tipping point? What would be the first signs of a tipping point for you?

Comments

  • Nowhere near tipping point yet. Only when supply by investment grade issuers floods the market, mopping up demand and then some, will the tipping point have occurred. Meanwhile (or so we are told) most blue chips are sitting on excess cash, so presumably no danger as yet.
  • I read that article too. Here's the link:

    http://blogs.telegraph.co.uk/finance/ianmcowie/100022038/bond-bubble-fears-and-why-i-have-taken-the-biggest-bet-of-my-life/#disqus_thread

    A theme of the article is that INFLATION LOOMS as the inevitable result of QE and low growth. The bonds he describes as the main victims of that scenario are gilts (interest rates go up-->bonds go down). I agree.

    However the higher risk & coupon prefs bonds and PIBs along the lines of LLPC, NWBD etc have however much higher coupons that will remain above the threshold of the inflation rate for a long time and so will largely evade this issue, IMHO at least.

    Practical steps for the likes of us:

    (1) Dump any investments that are gilt-heavy now: for example my old ISA : Legal & General Fixed Interest Trust A Inc. Regardless of the bond bubble bursting or not there is a very good reason to do this in any case, which is that as existing bonds in the fund mature, replacement bonds will reflect the current gilt yield curve i.e. the yield will be much less.

    (2) When the time comes, forum user John's recommendation of a short gilt fund is the way to act : ETF XUGS :( charges .25% plus cost of carry the [cost of borrowing and maintaining the short position on the bonds]

    More generally, I have been surfing the web for general macro predictions for 2013 and see no clear pattern, but plenty of dogs in the fight ("Gold/Silver!", "Equities!", "Bonds still have a way to go!" & etc.)
Sign In or Register to comment.