Investment Insights Bonds: the next bubble?
Asset managers Allan Gray and Coronation caution against government bonds.
Julius Cobbett
20 January 2009 06:30
On Monday, two asset managers released bearish commentary on bonds. Allan Gray's Ian Liddle asks if government bonds are in a bubble.
"Judging by the recent fall in yields on US ten-year government bonds to a low of 2,1%, Mr Market believes that policymakers will tighten monetary policy in time to prevent large-scale inflation," says Liddle. "Perhaps this places more faith in bureaucrats than is warranted.
When you buy a bond, you are locking in a return over a number of years. Thus, bond investors are terribly afraid of inflation.
For example, if US inflation is higher than 2,1% over the next ten years, investors in government bonds will actually end up poorer once their bonds mature.
Liddle hints that it might be a bit much to expect US inflation to be low.
http://www.moneyweb.co.za/mw/view/mw/en/page66?oid=258511&sn=Detail