The firm recently surveyed a number of fund managers, and bond market fears clearly rose to the top of the list. As you can see below, only the “EU disintegration” beat out “Crash in bond market/rising credit spreads” in terms of what money managers feel is the biggest “tail risk”:
Despite record low yields, investors have still flocked to government bonds over the last several years because they simply didn’t have many other “safe” choices. This trend, in turn, has driven what many believe is a huge bond market bubble. Still, many managers believe that the yield curve will steepen soon:
A steepening yield curve means that the spread between short- and long-term bond yields is increasing. For that to happen, either long-term yields have to rise at a faster rate, or short-term bond yields have to fall at a faster rate. Those scenarios typically happen during periods of economic expansion and rising inflation, although no one really knows, given how deeply involved central banks are in the bond markets these days.
A final important finding from the survey involves the relative positioning of bond allocation versus cash. As you can see below, this ratio is at its lowest point in over ten years:
What do these results mean for the bond markets? The world’s largest asset manager, BlackRock, recently wrote that investors should prepare for a December rate hike. That would mean that long-term bonds present a big risk right now, so investors should watch them very carefully.
The SPDR Lehman Long Term Treasury ETF (NYSE:TLO) rose $0.08 (+0.10%) to $76.37 per share in Tuesday morning trading. Year-to-date, the TLO, which holds bonds with durations of ten years or longer, has gained 9.29%.
Meanwhile, the iShares Barclays 20+ Yr Treasury Bond ETF (NASDAQ:TLT) rose $0.14 (+0.11%) to $132.57 per share in Tuesday trading. Year-to-date, the TLT, which invests in bonds with durations of 20 years or more, has gained 9.95%.
Investors looking for more options in the bond space — including shorter-term bonds that should perform better in a rising rate environment, should consult our List of Government Bond ETFs.