Bonds in a Bubble; When Will it Burst?
Traditionally, Bonds have been thought of as one of the safest investments out there. But do bonds really deserve that glowing reputation? Recent events are casting doubt on the safety of bonds, and making investors think twice about using them as a retirement savings vehicle.
First was the disastrous GM bond issue that left many investors holding the bag when General Motors went bankrupt and had to be bailed out by the U.S. government. These people, some of whom had worked for GM for years, were devastated financially when they found out the GM bonds they owned were now basically worthless.
Next were the series of municipal bankruptcies that left investors wondering why they had put so much faith in local governments. Municipalities often issue these bonds to pay for projects like sewer and road construction, or to finance construction of various municipal buildings. In the past municipal bonds were considered one of the safest investments out there, because cities rarely failed to pay them back. That all changed when cities all over America, like Harrisburg, PA and Stockton, CA, began defaulting on their loans, delaying bond payments indefinitely while they struggled to get their finances in order.
Third are the Treasury bonds touted by many financial advisors. With Treasury bond yields at historic lows, these don’t make a great investment either.
Right now, things seem great for bonds, but many experts are warning that the bond market is in a bubble. The examples above show how bonds can crash as easily as any other securities investment. So when the bond bubble bursts, where do you want your money to be?