My Comments: The word “bubble”, in the context of investments, has come to mean a time when values are overstated, and many people are going to suffer financial disaster. The classic examples include the Tulip Mania, where in February 1637 in Denmark, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. More recently, we remember what came to be known as the dotcom bubble in 2000 when all those companies came crashing down.

Arguments can be made for real estate in this country in 2008 and in China today. This article suggests there is another in the making with respect to bonds. Interest rates have been low in this country for a long time, and it’s a given that when interest rates rise, the value of the underlying bonds declines. I have a solution for you, and you can better understand what I have in mind if you will click on the investment image that accompanies this blog post.

by Jeffrey Dow Jones

Bonds?

I’ve been listening to people talk about a bubble in bonds for years, ever since the Fed first started embarking on its QE programs.

Bonds have always had reputation for being a somewhat exclusive, elitist investment. These days that isn’t technically correct with myriad ways to own them in the mutual fund and ETF space. But still, most Main Street investors will purchase stocks before bonds, and you hardly ever hear anybody talk about bond market on the local news. Who talks about bonds down at your club? Old guys with bow ties, that’s who.

So before you click away to TMZ or to set your Fantasy Football Lineup, saying, “whatever, I don’t own no stinkin’ bonds,” consider this: If you have some kind of employer-sponsored retirement plan, you probably have exposure to bonds. If you have one of those trendy new “target date” funds in your 401k, you’ve got bonds. If you work for the state and hope to get a pension some day, you certainly have exposure to bonds. Heck, if you own a house or someday might like to, the bond market is incredibly relevant for you because that’s what determines how much you pay for your mortgage.

It’s a $16 trillion market. It touches everybody.

And that’s just Treasuries.

For all intents and purposes, interest rates today on Treasury bonds are as low as they’ve ever been.

Put another way, bonds are more expensive today than they’ve ever been.

They’ve been slowly getting more expensive for 30 years. But unlike most assets, there’s a theoretical limit on how expensive bonds prices can get. At least in nominal terms. Very rarely do we see coupon rates on bonds that are negative — a negative yield means that you get paid back with less principal than you originally loaned. There has to be other exogenous factors at play to convince investors to make a deal like that (eg. possible currency appreciation).