Bonds have enjoyed a huge rally since the onset of the financial crisis four years ago, as investors have sought safety in Treasurys and yield in other fixed-income-market sectors.
But many don’t realize they’re actually taking some risk, John Boritzke, director of tax-exempt fixed income at BMO Global Asset Management says.
What goes up generally goes down, and if you’re investing in bonds through mutual funds or exchange-traded funds, you could suffer a loss of principal.
The downside risk is “a bit worrisome,” Boritzke says. “Bond investors have not had to suffer price declines. That experience may be new to people who have become more aggressive.”
While he doesn’t see a bubble in the bond market as a whole, “if there’s a bubble in part of the market it’s that there’s way too much money flowing into high-yield [junk bonds],” Boritzke says.
“Some of the deals being priced into the market are becoming too aggressive.”
So far defaults have been low following the financial crisis. But the fiscal cliff could change that, Boritzke says. “We don’t have a lot of room for error in terms of [gross domestic product].”
With interest rates near record lows, corporate bond issuance is on pace for a record high this year.
“There’s been lots of new issuance,” William Larkin of Cabot Money Management tells Bloomberg. “At some point this is going to dry up, as people become more cautious and demand starts to fall.”