October 4, 2010
There is considerable buzz in the investment community lately about a possible "bond bubble." It's easy to understand the level of concern. Simply Google the phrase and you'll get nearly half a million hits. Investors are still licking their wounds from the financial crisis (caused by the bursting of the last great bubble - real estate), and memories of the tech bubble 10 years ago have not yet faded. So is there a bond bubble? How can we tell? If there is, who will it affect, and how?
We'll look at those questions over the next few days. Let's start with defining the term "bubble." Simply put, a bubble is a price level for an asset that is much higher than is warranted by fundamentals. But that phrase "much higher" is the heart of the matter. Market prices for any asset are set by what participants are willing to pay, and anyone buying anything generally believes they are not overpaying. Whether the price was too high is only obvious in hindsight (see: real estate and dot-com stocks).
Next post we'll look at some bond market facts - don't yawn, it won't be long and boring.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).