Bond Bubble and Index-Linked Bonds

Discussion in 'Economics' started by denton, Jan 11, 2009.

  1. denton


    Hi folks.

    I am a big buyer of the bond market bubble theory, feeling that we are in for a bout of high (hyper?) inflation.

    The obvious strategy seems to be to buy index-linked debt (bonds) but I'm a bit concerned that although I'm right on inflation, I might be buying into the bubble.

    I guess my question is - if the bond market were to fall out of bed (crash) would index-lined bond prices go with it? Or maybe they would rocket? My gut feeling is that prices would go hand in hand in times of low volatilty, but might go in opposite directions in a bond crash?

    I've tried to research index-linked bond prices but it seems a bit of a minefield.


  2. 1) The "bubble" is indicative of deflation, not inflation.
    2) If you believe inflation is coming about and/or the "bubble" will deflate, then the "obvious" thing to do is to short-sell bonds.
    3) If stocks move sharply lower, treasury bonds should still have some potential to the upside. Lower-quality debt, i.e. corporates and municipals, can move lower in a divergent manner from treasuries.
    4) Index-linked bonds can be more volatile than individual bonds because of illiquidity and an inability to gauge the value of the underlying index.
    5) Take it all with a grain of salt. :cool:
  3. If hope you're right. I hope we're in for inflation and the bond market got it all wrong.

    Just, what if it didn't? What if the bond market's got it right? What if annualized GDP growth over the next 10 years is -0.3% a la Japan 1990s?

    JGBs started a huge rally in the 90s and never looked back. How many people blew up shorting JGBs because they were an "obvious bubble"?
  4. denton


    I would rather say the falling yields reflect the "depressional" climate - falling shorter-term inflation and a flight to quality.

    Correct, but I have cash to invest (my pension fund) so am limited to either holding cash or buying a managed fund.

    That is what is happening now - rising bonds driven by falling stocks - but with massive supply coming online and massive (reckless) fiscal stimuli I expect inflation to rocket.

    What do you mean by "inability to gauge the value of the underlying index."?

    I simply want to hedge my cash against inflation, but am worried about the value of the bonds falling (crashing). It seems to be hard to guage how the price might react when the inevitable bond bubble bursts.
  6. denton


    Liquidity can dry up in any market!

    Back to my original question...

    if bonds crash will index-linked bonds rise (inflation expectations) or will they come down in sympathy?
  7. they will do whatever they have to to shake you out.

    then they will move in your original direction.
  8. Bernanke's recent passivity and comments about "making the economy better but we don't know when" is nothing more than a ploy to keep the Bond Market alive...

    While the sirens are singing you should plug your ears or you'll crash into those rocks.