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Bond Mania
Some snips
Attracted by rising prices, more new money went into government bond funds in July and August than in the prior 12 years combined.
"It's a mania," says financial planner Greg Schultz of Asset Allocation Advisors in Walnut Creek, Calif. During the bull market, clients beseeched their financial advisers to move more money into tech stocks. "Now, I'm feeling the same pressure the other way," says Los Angeles financial planner Phil Cook. "They're telling me, 'Get me into bonds. I'm tired of losing money.' "
The "smart money" is also rushing to the party.
(hmmmm says mish)
In the $3.4 trillion market for treasuries and savings bonds, U.S. households hold only $511 billion and mutual funds $120 billion more. The rest are bought by insurers, banks, and foreigners. They're acting little different from Nasdaq jockeys, flooding into bonds just because they've done well recently.
Mind the gap. Another risk: The bond market's recent rally may be a byproduct of the activity of one large bond buyer, rather than of economic fundamentals. In a quirk that usually fascinates only bond geeks, bond prices have recently tracked the market positions of mortgage giant Fannie Mae, which has been scrambling to keep up with a wave of refinancings prompted by slumping interest rates.
All of a sudden, everyday investors are grappling with the arcane concept of "duration gap." Fannie Mae makes money by buying mortgages, then selling its bonds to investors at a lower interest rate, and pocketing the difference. Ideally, homeowners pay off their loans at the same time that Fannie does, which keeps everything in balance. But when homeowners refinance and pay off their mortgages sooner than Fannie expects, a gap emerges. Unlike its more conservative cousin Freddie Mac, which keeps its gap close to zero, Fannie often allows its gap to exceed its goal of six months. Investors were spooked last month when Fannie said its August gap had reached 14 months. Bond traders rushed into the market to buy up treasuries, since they figured Fannie would be doing the same to cover its mortgage positions. Fannie says it didn't buy treasuries but bought more mortgages and interest-rate hedges to reduce the September duration gap to 10 months. "We are in the best shape we've ever been in," says spokesman Chuck Greener.
(hmmm says mish)
The worry: If the two lenders lose control of their portfolios, the feds would have to come to their rescue, precipitating another savings-and-loan-style crisis. They're "safe and sound," asserts St. Louis Federal Reserve President William Poole. But "some things currently happening are putting Fannie under greater strain," Poole says.
"This will end ugly," says Bondtalk's Crescenzi. The last major bond market bubble–in 1994–ended with the bankruptcy of Orange County, Calif., which bet wrong on falling interest rates. That year, nearly 9 of 10 bond funds lost money. That's why some experts believe the frothy bond market is sending a buy signal for another asset class: stocks.
(Why can't stocks and bonds both crash asks mish)?
M |
