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August 20, 2014 at 10:22 AM
Long-term bonds are enjoying strong yields these days, which is good news for investors. But watch out, because a painful day of reckoning is on the way, says investment strategist John Mauldin.
“Investors are barely being compensated for the risks they’re taking” with corporate bonds, for instance, Mauldin wrote in his latest viewpoint on the bond market, “Bubbles, Bubbles Everywhere.”
“One day, all the debt will come due, and it will end with a bang,” said the chairman of Mauldin Economics.
Some investors, at least in the short term, are pleased with their rewards.
The 30-year Treasury is outperforming junk bonds and the S&P 500 by a wide margin this year, Bloomberg reported Tuesday. These long-term bonds, which dropped about 15% last year, are up 17.5% in 2014.
Investors don’t seem too worried about rising rates in the immediate future, some experts suggest, because the Federal Reserve continues to trim down economic-growth expectations.
Plus, they seem content with yields of 3.2% today, despite the fact that this figure falls short of 4.1% average of the past 10 years.
While many asset classes are “looking like bubbles from our cheap seats,” Mauldin says, he is particularly concerned about the corporate bond market.”
“Average yields on investment-grade debt worldwide dropped to a record low 2.45% as we write this from 3.4% a year ago, according to Bank of America Merrill Lynch’s Global Corporate Index,” he explained.
Overall, veteran investors in high-yield bonds and bank debt “see a bubble forming,” noted Mauldin, the president of Millennium Wave Advisors and Millennium Wave Securities in Dallas.
Wilbur Ross Jr., chairman and CEO of WL Ross & Co., Mauldin adds, has gone so far as to point to a “ticking time bomb” in the debt markets.
Some $500 billion a year of this debt comes due between 2018 and 2020, Ross shares.” Government bonds are not even safe, because if they revert to the average yield seen between 2000 and 2010, 10-year treasuries would be down 23%.
“If there is so much downside risk in normal Treasuries,” riskier high yield is even more mispriced, Ross said. “We may look back and say the real bubble is debt.”
What’s leading to bubbles these days? The economy is weak, and inflation is low, Mauldin argues. “The growth in the money supply doesn’t go to driving up prices for goods like toothpaste, haircuts, or cars. It goes to drive up prices of real estate, bonds, and stocks.”
