Bond Bubble? I Don't Think So

02/16/2011 11:21 am EST

Focus: MARKETS

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Most fund investors have little exposure to long-term debt, unless it’s the debt they’re charging on their credit cards, writes Dan Wiener of the Independent Adviser for Vanguard Investors.

You can spin the economic and market news pretty much any way you like. As January (with its 2.7% and 2.3% gains for the Dow Jones Industrial Average and the Standard and Poor’s 500 index) came to a close, the spinmeisters had plenty on their plates.

Top of mind: Economic growth. The initial report that US gross domestic product grew at a 3.2% rate in the fourth quarter of 2010 was either an “acceleration” from prior quarters, or a “disappointment” as it failed to match expectations of growth in the 3.5% to 3.6% range.

Since the first data became available last year, I’ve been suggesting that the consumer was unleashing his or her wallet and spending again. Whether it was iPhones, BMWs or Coach bags, our national pastime is shopping, and you just couldn’t keep a leash on it forever. Consumers increased their spending by 4.4% in Q4. Even if the GDP number doesn’t change, and it well could in the next two revisions, at $14.9 trillion the US economy is now the largest it’s ever been, surpassing the inflation-adjusted peak established three years ago in Q4 2007 and the nominal peak of Q3 2008.

Bonds: Much Ado About Very Little

Second up on the spin cycle is the bond market. Whether it’s municipal bonds or taxable bonds of all stripes and shades, the pundits were at it again as the month closed, talking about the “bursting” of the bond “bubble.”

A recent prediction of losses that could reach near double-digits for bond investors seemed overwrought and misleading at best. Vanguard hosted a one-hour web seminar on muni bonds and received 1,200 online questions while the show was in progress.

Sheer numbers, at least from a Vanguard investor’s perspective, don’t support the “bursting”theory, at least not when it comes to our wealth. For one thing, 46% of assets in Vanguard’s fixed-income funds are in money markets or short-term bond funds. Forty-five percent of assets are in intermediate-maturity funds. Just 7% are in long-term funds and 2% in high-yield corporate (up 2% in January).

And worries about municipal bond default somehow hurting Vanguard investors are even sillier given that only about 15% of all of Vanguard’s fixed-income assets are in tax-exempt bond funds which, by the way, suffered mainly fractional losses in January—Ohio Long-Term Tax-Exempt (VOHIX), the worst, lost 1.4%.

Vanguard investors simply are not standing in front of a speeding train. Given that Vanguard is one of the largest fund companies in the country, if not the largest, depending on how you count assets, fund investors can breathe a little easier as 2011 rolls along. Bond bubble? I don’t think so.

[If Vanguard investors were concerned, it might have been because of a warning by the company’s chief investment officer, Howard Gold notes. Gary Shilling is one of the very few pundits still expecting great things from Treasurys--Editor.]

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