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Is there a Treasury bond bubble?

By Sheyna Steiner ·
Thursday, August 19, 2010
Posted: 2 pm ET

Recently there's been some low-level agitation in the news about a Treasury bond bubble as investors continue flock to safe investments.

In my last post I mentioned the Wall Street Journal article "The Great American Bond Bubble," but not everyone agrees with the authors', Jeremy Siegel and Jeremy Schwartz, basic premise that pessimistic investors are inflating a bond bubble with their fears and that value stocks may be a better pick for income and inflation protection.

A column by Walter Updegrave on persuasively argues that bond bubble fears may be nothing more than hot air. He doesn't actually say that but I couldn't resist the pun.

The article answers the question posed in the title, "Will the next pop be the bond bubble bursting?"

Answer: Probably not but no one really knows what rates will do. Keep your bond portfolio diversified and avoid long-term bonds. The value of long-term bonds will be more affected by rate increases.

Donald Cummings Jr., managing partner at Blue Haven Capital in Geneva, Ill. has a similar viewpoint.

"I think that when the economy gets going, interest rates have a ways to move back up. But, boy, it's going to be a while before the economy gets going," he says.

"If a person had a 10-year Treasury bond in a 60 percent-bond, 40 percent-equity portfolio, and Treasuries fall 10 or 12 percent in a few years when rates go up -- I think they're going to far outperform that in equities," says Cummings.

When the equity portion of your portfolio does well, the fixed-income side could be struggling and vice versa. That's why investment professionals recommend a mix of non-correlating asset classes.

Bond bubble or not, keeping a diversified portfolio will mitigate the impact asset class bubbles and bursts have on your portfolio. Read this Bankrate story for more on asset allocation and building a diversified portfolio.

Cummings doesn't recommend going too far out on the yield curve but he's not avoiding Treasury bonds either.

"I sure wouldn't be buying 30-year paper right now. There are alternatives to Treasuries but they are not bad anyway," he says.

If you're nervous about a bond bubble implosion, your fears may be over-inflated.

Does media coverage of financial issues affect your investment strategy or do you stick with your plan no matter what?

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