Bond Bubble Brewing?

From Bloomberg:

The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the internet bubble, stoking concern that fixed- income markets are headed for a fall.

Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.

Concern that the global economic recovery is faltering, with the U.S. growing at a slower-than-forecast 2.4 percent pace in the second quarter, is prompting investors to pile into fixed-income securities of all types even with some yields at record lows. The new cash has helped fuel a rally and drove yields on investment-grade U.S. corporate debt down to a record 3.79 percent last week, while two-year U.S. Treasury yields fell to an all-time low of less than 0.5 percent.

The money flowing into bonds is “probably not repeatable on a consistent basis,” said Joel Levington, managing director of corporate credit in New York at Brookfield Investment Management Inc., which oversees $24 billion. “Eventually it won’t be sustainable. Whether that means five years from now or five weeks is a little difficult to tell,” he said.


It appears that we will soon be in for another history lesson with respect to bonds.

Please consider the chart below from Karl Denninger's site.

The flight to bonds is not surprising, given the recent stock market behavior.  Investors are seeking safety in an uncertain investment climate.  If history is any indicator, the current movement into bonds has many characteristics of a bubble.

It is my view, that we are seeing a repeat of the 1930 - 1931 time period with a flight to "quality" sovereign bonds.  This may allow the sovereign debt crisis to carry on longer than some expect, but eventually the day of reckoning comes as countries are unable, or refuse to honor their bond commitments.

Consider the advice of Richard Russell in a recent interview with King World News:
"My thoughts now is I want subscribers to be out of all stocks and bonds except gold and gold items.  Before this bear market is over, its going to take down everything.  We're in cash and gold, and probably less cash as time goes on."

Hence my own bearish outlook is confirmed as I emphasize an old saying, "return of capital is more important than return on capital."