Fixed Income  

Investor gloom proves bond bubble fears are ‘unfounded’

Investor gloom proves bond bubble fears are ‘unfounded’

Claims that bond markets are trading at bubble levels have been rejected by behavioural experts, in a reassuring sign for investors nervous about their fixed income exposure.

Memories of disastrous losses suffered when the technology, media and telecommunications (TMT) bubble collapsed in 2000 have been evoked by recent bond market performance, with investors now effectively paying to own many highly rated securities.

But the experts said telltale psychological signs of a bubble – a phenomenon where prices rocket to irrational levels – are absent from the market.

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Economics professor Robert Shiller, of Yale University, told Investment Adviser a bubble was a social epidemic that generates accelerating returns with investors who are “euphoric” about investing in their asset class of choice.

But currently bond investors are far from euphoric, he said. In fact, they were deeply concerned about the asset class, added Mr Shiller.

He pointed out that today’s bond investors “don’t think it is a wonderful and exciting investment”.

By the time the TMT bubble, also known as the dotcom bubble, peaked on March 10 the Nasdaq had reached an intraday high of 5,132 points following three years of frenzied buying of companies such as now defunct online retailers Pets.com and Boo.com.

Just two years later the tech-heavy exchange was trading at 1,108 points.

When the bubble burst investors lost billions as prices plummeted and numerous businesses collapsed.

Of late, investors have flocked to bond markets amid unprecedented efforts from world central banks to prop up their ailing economies – including vast quantitative easing programmes that have involved directly buying bonds.

Last year government bonds, which typically offer modest returns in comparison to equities, outperformed almost all other asset classes. A flurry of bonds issued by both governments and companies are now trading at negative yields, meaning any investor who buys and holds them until maturity would lose money.

However, David Stubbs, global market strategist at behavioural investing specialist JPMorgan Asset Management, said the bond-market buying was based on factors other than excessive exuberance.

“What we’ve got here is an unusual world – an asset class pushed up in price by government action and regulation, but it doesn’t have the dynamics or position that characterise a bubble,” said Mr Stubbs.

He said some multi-asset managers were obliged to hold bonds regardless of whether they wanted to, meaning sales activity in the event of a down market would be constrained.

But “no one was ever forced to hold technology stocks”, he added.

Frances Hudson, global thematic strategist at Standard Life Investments, said bond investors were generally “grumpy and pessimistic”, with one of the chief reasons cited for purchasing the asset class was that it acted as a shelter from the volatility of the equity market.

“It is not hype that investors are buying into, but central bank policy, and so to that extent investor behaviour does not make this a bubble.”