This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Beware of the Bond Bubble

NEW YORK ( TheStreet) -- It's ironic that while pundits and politicians are fulminating about our nation's debt crisis, the top-performing asset class in our public financial markets has been U.S. debt securities.

Other countries facing a debt crisis have seen the value of their bond issues drop as investors grow concerned about the risk of default and buyers of the bonds demand a higher yield to compensate them for taking that risk.

The U.S., however, is a different animal. On the day Standard & Poor's cut its triple-A credit rating last summer, the value of U.S. Treasury bonds actually rose in spite of the country's political gridlock, its spiraling entitlement costs, its foreboding demographic trends, its total debt that now amounts to more than $15 trillion (over 103% of GDP), and its annual budget deficit approaching $1.5 trillion.

Despite this precarious fiscal position, the market doesn't look worried about a U.S. debt default -- and with good reason. For all its problems, the U.S. remains a wealthy nation, and its economy is in relatively good shape compared to the rest of the developed world. Moreover, it enjoys the privileged position of printing the world's reserve currency, the almighty greenback. This cuts the country plenty of slack to run up debts and print dollars to stimulate its economy and meet its obligations, and that's what it has done.

Now, the yield on the 10-year Treasury bond -- the investment world's benchmark for a risk-free return rate -- has set record lows as global economic devastation threatens. Investors, still feeling the burn of 2008's financial collapse, are fleeing the volatility of the stock market for the promise of capital preservation in Treasuries and other fixed income assets.

For some investors, Treasuries and other bonds are certainly appropriate, and most investors should have some allocation to fixed income in their portfolio. But many of those piling into the bond market, particularly Treasuries, are now are making a mistake. Treasury bonds are in the midst of the market's latest asset bubble, which will pop sooner or later.

At this point, some readers may be thinking, "Hey, I've been hearing this argument about Treasuries for a while, but it keeps turning out to be wrong. Yields keep going lower, and bond prices keep rising." True, but that's the nature of an asset bubble. They're caused by a perfect storm of events that allows them to keep ballooning, appearing to prove the skeptics wrong and winning new converts. That's what makes them so dangerous.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,161.12 +29.15 0.17%
S&P 500 2,004.93 +5.95 0.30%
NASDAQ 4,569.3640 +16.6050 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs