After three decades of declining, the interest rates in the U.S. are near zero, and some experts on Wall Street believe that the U.S. bond market has become a speculative bubble that is about to burst, according to CNN Money.
Almost 40% of the 32 analysts and investment managers polled by CNN Money believe that interest rates will begin to rise this year, and another 30% believe that the rising trend will be observed in 2014.
U.S. Federal Reserve (Fed) doesn’t plan to raise the federal funds rate, which is now close to 0%, before 2015. In December, the U.S. central bank said it would keep monetary policy at the same level to stimulate the economy until unemployment will fall below 6.5%, a trend predicted by the Fed for 2015.
“Like it’s been in the case of Japan, low interest rates can go on much longer than expected, but right now it seems that all the stars are aligned for interest rates to rise. But ultimately, whether it happens in 2013, 2014 or 2015 doesn’t matter too much. What matters is that you’re not invested in bonds when they do rise,” said Jeff Weniger, senior investment analyst at BMO Private Bank.
The value of bonds falls when interest rates rise. The prospect of rising interest in the U.S. is worrying especially for private investors who rushed to redeem their bond portfolio following the financial crisis started four years ago.
Individual investors have invested nearly $210 billion in bonds in early 2008, at the same time withdrawing $700 billion from stock market. In 2012, bonds have attracted $90 billion from private investors while the shares have lost $150 billion.
Moreover, the “congestion” on the bond market is an additional risk, considers Ryan Detrick, an analyst with Schaeffer’s Investment Research:
“Bonds are definitely an area we would lighten up exposure. If we’ve learned anything over the past 100 years of market history, it is that when the crowd thinks one way, you might want to go the other way. Should you have some bond exposure? Yes. But should you be overweight bonds? Absolutely not.”
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