In the investment world, year-end cheer takes the form of outlook pieces regarding the fate of the financial markets in the coming 12 months. This year, however, bond market commentators are putting a damper on the holiday spirit with commentary that has been almost uniformly negative. While most strategists simply see a year of low returns on the way, the talk of a bubble in bonds has been growing louder in the past month. Fidelity, however, takes a different view. In a piece posted on the company website on Tuesday, Roger Young, Senior Vice President of Fixed Income, lays out the case for why this is not in fact a bubble despite the massive inflows into bond funds during the past year.
Young lays out three reasons why the bond market isn't destined for a collapse in 2013: the economy would need to improve dramatically, the Federal Reserve would need to end its policy of quantitative easing, and the U.S. Treasury market would have to lose its status as a "safe haven." In addition, Young points out, rising rates means that investors can make up for some capital losses via higher income as bonds mature and the principal is reinvested at higher rates.
To be fair, Fidelity, as a mutual fund company, has a vested interest in keeping people invested in the financial markets. Still, this article provides some much-needed ballast to the incessant talk about the bond market bubble. See the full piece here.