| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Rise Of The Bubbleheads |
Forbes.com - Jan, 20, 2010 - by Matthew Craft
If you worry the Fed is fueling a bubble for low-rated debt, a bond guru has a name for you.
What do you call financial experts who cry "bubble" when the price of an investment moves steadily higher? Martin Fridson, a noted observer of debt markets and a bond fund manager, has resurrected a name for them: "bubbleheads."
Fridson's particular problem is with those who see a bubble in high-yield bonds, which returned 57.5% last year and have already gained 2.2% this month, according to a Bank of America Merrill Lynch index. The case for a bond bubble parallels the one made popular by economists and Chinese officials who say that the Federal Reserve's low-interest-rate policy has encouraged borrowing at short-term rates to speculate in Asian real estate, emerging-market stocks and gold prices. Similarly, they say, the flow of money into high-yield bonds has pushed the market so high and so fast that it's bound to fall. Harvard economist Kenneth Rogoff, newspaper editorial writers and economic bloggers have voiced similar versions of the argument.
Fridson thinks the term "bubble" is too easily abused and that a speculative bubble has formed around calling things bubbles. A bubble implies people are picking up a product to sell it at a higher price, passing it on to "a greater fool." Investors, by contrast, are buying high-yield bonds to savor the 8% payout. At an average 97 cents on the dollar, prices for low-rated corporate debt may look rich, says Fridson, head of Fridson Investment Advisors. But these bonds are likely to take a hard hit only if the economy goes into another tailspin, Fridson says. That is, if the "double-dip" scenario plays out.
Plenty of prominent economists have recently warned that the economy could begin shrinking again, including Paul Krugman and Martin Feldstein. Those who see a bond bubble assume this is destiny, Fridson says, but that's far from the consensus view.
Even if it's driven by speculative fervor, the flood of money into the high-yield market has allowed companies to refinance more expensive debt and push other due dates into the future, which makes them better able to handle a turbulent economy. Some 75% of speculative-grade bond sales have been used to refinance debt in the past 12 months, Fridson says. Stone Energy ( SGY - news - people ), CMS Energy ( CMS - news - people ) and Brocade Communications ( BRCD - news - people ) have tapped the markets for this purpose in recent weeks (see "The New Bond Boom").
This refinancing wave has led rating agencies to lower their projections for companies missing payments. Moody's ( MCO - news - people ) expects 3.6% of low-rated debt to default this year. At that rate, and with yields on Treasury bonds rising 50 percentage points, the high-yield market may return 8.5% this year, Fridson estimates.
Others worry that when the Federal Reserve begins hiking interest rates, bond prices could collapse. That fear also seems misplaced, Fridson says. The Federal Reserve is likely to lift the federal funds rate only with clear signs of growth. If the economy escapes another recession and the feared double dip, the weakest companies would be better off.
A story in Bloomberg last week quoted Fridson saying that the "bubbleheads" weren't looking at the current state of the bond market but basing their views on a pessimistic outlook for the economy. Afterward Fridson searched around to see if anyone had made it into print before him with the same use of "bubblehead," as in a person who "erroneously characterizes a fundamentally justified price gain as a bubble." He found others using the moniker for a submarine crew and for Christopher Cox, the former Securities and Exchange Commission chairman.
In June 2005, however, CNBC's Jim Cramer used the term in a similar way to Fridson, except he wasn't defending a "fundamentally justified" rise in prices. Cramer, hailing the soaring stock of house builder Toll Brothers on The Street.com, called those folks worried about a speculative housing boom "bubbleheads." The bubbleheads clearly won that round. At the time, shares in Toll Brothers ( TOL - news - people ) had jumped over $100 before splitting in half. Toll's shares opened Wednesday at $19.43.
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