- Susana Vera/Reuters
Bond yields are low. Historically low.
While the serious flows into these debt instruments continue seemingly unabated, Scott Colyer, CEO and CIO at Advisors Asset Management thinks that the continued support for the asset makes no sense.
“Bond prices are the highest they’ve ever been, yields are the lowest they’ve ever been and we go back to 1776,” said Colyer. “This is such an anomaly it’s not even funny.”
Remember that the price of bonds increases as the yield decreases, so the cost of these notes is getting only more expensive. To Colyer, this increase looks like a bubble and smells like a bubble, meaning that it most likely is.
“We have record demand for an asset class in a time period where the expected future return for that asset are the lowest they’ve ever been in history,” said Colyer. “That to me defines a classic bubble. Money is being forced into an asset class not because of value, but because there is a perception of protection there.”
The idea is that investors and central banks are pushing the price of bonds upward unnaturally, so that might be a problem.
Colyer said that just because there is a bubble, it doesn’t mean that it has to pop. The biggest danger, according to Colyer, is the Federal Reserve raising interest rates too fast, which the central bank is trying not to do.
“That’s why the Fed is trying to let the air out of the balloon as slowly as possible, and you get all of the jawboning over the ‘slow path of rates,'” said Colyer.
To be fair, much of the demand for bonds – especially outside of the US – is being driven by central banks, and that may affect the settlement of the issue.
Colyer has some advice for investors, though it was not very self-serving.
“You should sell everything you have that’s related to bonds, and I’m a bond guy,” he said.