Some Wonder If Bond Market Has Reached Its Tipping Point
Sunday, June 7, 2009
A 27-year bull market in bonds is over and a brutal bear market is under way, says Tom Atteberry, co-manager of FPA New Income. That's bad news for bond investors, particularly those holding Treasurys and municipal IOUs.
Atteberry, who spoke with us at the annual Morningstar Investment Conference in Chicago, says there is good reason to believe that the run-up in Treasury yields that began late last year will continue. Atteberry says he's seeing anecdotal evidence that Chinese investors, huge holders of Treasurys, are beginning to sell their government-bond stakes. "They are very, very nervous" about the Federal Reserve purchasing Treasury debt because of the move's potential for stoking inflation, one of the prime enemies of bond holders.
Municipal bonds' attractiveness as alternatives to Treasurys may be in trouble. Interest from muni bonds is free from federal taxes, and the sector historically has seen extremely low default rates. Thanks to those benefits, munis have historically offered about 80 percent of the yield of Treasurys.
As munis were pummeled during the panic of 2008, they at one point offered twice the yield of Treasurys, making them even more attractive than usual. As long as munis offered a substantial yield cushion over Treasurys, they didn't necessarily stand to suffer from a rise in government-bond yields.
But as bond investors regained their appetite for risk in 2009, they pushed up muni prices -- and pushed down their yields -- to the point where that cushion has essentially disappeared.
Another concern: Atteberry points to a recent increase in corporate-bond issuance as evidence that executives expect their borrowing costs to head higher. And, still concerned about the health of the U.S. economy, he is avoiding high-yield, or junk, bonds.