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Class 7 Bond Bubble WSJ 8-28-2011

Class 7 Bond Bubble WSJ 8-28-2011 - reprieve for bond...

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Beware of the Bond-Market Bubble. Again. WSJ Edited by Cristina Lourosa-Ricardo, 8-28-2011 Spooked by stocks and unfazed by the recent downgrade of U.S. debt, investors have turned to Treasurys as a safe haven. But are their moves inflating the risks in the broader bond market? The latest Treasury rally has done little to quiet year-long concerns that bonds are in a bubble. Two weeks ago, investors flocked to government bonds, pushing yields on the 10-year Treasury below 2% for the first time in at least 50 years. That's also down from the 2.6% yield pre- downgrade, and below the 2.8% threshold first hit last October, when many took the view that the bond market was headed for a pop. Now bond bears say the latest rally is setting up the bond market for an even bigger crash once interest rates start to rise. To some, this may sound one more false alarm. The warnings have remained the same for months, and the bond market still hasn't collapsed. And the Federal Reserve's recent announcement that it plans to keep rates low for another two years seems to signal another
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Unformatted text preview: reprieve for bond investors. But even if rates stay low, counter the bond bears, the bubble is getting bigger -- and more dangerous. Most bonds are priced relative to Treasurys, so if the rates on Treasurys are too low, then so are the rates on everything else. If and when Treasury yields start moving upward, the losses will have a ripple effect, says Elaine Stokes, co-manager of the $21 billion Loomis Sayles Bond fund. For bond investors, the damage could come in two waves: in the near term if rates rise to reflect positive economic growth, and again in the longer term as interest rates climb again. If rates rise, bond holders could be forced to sell their bonds for less than what they paid (or at least less than what they are worth today). Longer-dated bonds are the most vulnerable, because the longer an investor has to wait for his bond to mature, the greater the chance that an increase in rates could diminish the value of that bond....
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