Trident, Lance SpicerDear Reader,A bubble is forming that many...

Trident, Lance Spicer

Dear Reader,

A bubble is forming that many people dont know about. This bubble will eventually burst as they always do and investors will lose hundreds of millions of dollars (again). The bubble Im talking about is the Bond Market Bubble.

For the last 30 months in a row, inflows into bond mutual funds in the US have been higher than inflows into share funds. The totals are simply ridiculous US$559 billion has flowed into bond funds in the last 30 months, compared to $233 billion that has been withdrawn from stock funds.

This simply means investors are selling stocks and buying bonds, often using managed funds as the vehicle. It seems the stock markets volatility has worn them out and they want safety in bonds. This has caused bonds to be overvalued by a wide margin and stocks undervalued by a wide margin. However, investors perceptions about bond funds are all wrong. You can and will lose money. If interest rates rise by say 2% over the next year, the capital value of a typical bond fund would drop by 20%! This is an investment that people feel is safe, thats why they are happy with a return thats currently under 3%.

Yet the investors continue to Buy High and will ultimately Sell Low when the Bond Market Bubble bursts in coming months.

Right now, bonds have never been more expensive relative to the stock market and the stock market here and in the US is around 25% undervalued on an historical Price to Earnings valuation and earnings are rising rapidly! What are investors thinking?

The stock market presents great value right now despite all the doom and gloom and will in coming months be the focus of bond investors as the bubble bursts. It will only take the talk of the first interest rate rise in the US to start the Sell Bonds Buy Stocks scenario.