# Bond bubble - what are the other options?



## MountainKing (Jul 26, 2012)

So I've been reading a lot of stories on the financial web sites (ya' - I know) and the recurring theme the past few months has been talk of a "bond bubble". I really have no idea what they are talking about and was wondering if someone here could explain it in easy terms.

From what I gather, with all of the quantitative easing that has gone on, and the flight from risky stocks, bonds have done pretty well the last couple years. I actually thought the market was going to tank hard last year and as a result I moved all of my 401(k) into a bond fund.

The fund available to my company is the Vanguard Total Bond Market Index Signal ( VBTSX )

As you can see, over the past two years since I had moved my funds into it, it has done steady progress (3 to 4%) but man I feel like I missed out on a good year for stocks last year (13.7% for the past year in the S&P for instance). So while I slept better at night, I did miss out on some growth. I'm OK with that.

But now I'm reading that I could wake up one day and my bond fund could totally collapse. So the "pros" are recommending shifting into equities. But that doesn't seem to make sense to me since the S&P is nearing a 5 year high. Doesn't that seem like "buying at the top"? Or are the pros just trying to get everyone to pile into equities so they can short it and pull the rug out from under the masses?

What kind of "implosion" would a bond market suffer and what kind of negative returns are they talking about? I mean, if I was looking at suffering -2% annually or something compared to the risk of being in equities, I could stomach that. But I'm confused over what kind of loses they are talking about.

Which brings up the second question - if not bonds - what? My plan does not appear to offer any cash sideline option or money market fund that I can tell. Well, they do offer something called a "Key Guaranteed Portfolio Fund" that they don't allow me to automatically utilize using the website. I think it is something I have to call and select. Probably because it is so low yielding that it doesn't help the fund management company out. Reading the prospectus for that it also implies that it is a fund that is "backed by the assets of the company". Somehow, that is not reassuring.

I've attached the array of different investment options - but I'm wondering if I should just stay with the bond fund and ignore the dire predictions of the professionals.

Granted, I could liquidate the 401(k), pay the 10% penalty and taxes, and have my money, but I have to balance planning for our future with planning for disaster (we are doing both).

So what's up with this bond bubble? Anyone?

MK


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## cqp33 (Apr 2, 2012)

MountainKing, while I am not a financial wizard in any sense I have done a lot of reading over the last 18 months on our economy and how everything is linked together. I recommend the book "Aftershock" ( it is well written and easy to follow. I have also read several articles about the, real estate, dollar, inflation and stock bubbles none of which are a rosy picture! While there is not a lot of agreement on these topics there is a lot of info out there.

The book aftershock talks about the six different bubbles that they "claim" will pop in succession once they get rolling. They also talk about the effects that QE will have long term on the economy as well. After I read it I said to myself, "How can't this happen" because of the way they inform you along the way through the book. A great read!

Knowing what I have read over the last 18 months I am not sure what I would put any investment into, I do have some Precious Metals and am active duty so I have my retirement (or do I if the guberment can't pay their bills what does doing 20 years active duty get me?). This book made that painfully obvious to me!

Also I recommend watching the video "The Aftershock Survival Summit" on you tube before you make a decision to buy the book. The video is kind of long, 40 minutes I think but that is what compelled me to purchase the book!

In the end I would not put any stock into one theory though, since I have read the book though I can't find anything that points to anything else. Bottom line, it's your money and doing the homework like you are is the smart play!
Good luck MountainKing!


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## hiwall (Jun 15, 2012)

I think many, many people are sitting just where you are. I am semi-retired(too young to retire and too old to get hired). I was playing the stock market to make some money. In 2011 I made 30% but in 2012 I lost my nerve(it takes nerves of steel). Now my money is just sitting doing nothing. What to do when everything looks like it is going to bust. Good luck to us all.


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## MountainKing (Jul 26, 2012)

Thanks for the thoughts and information. Indeed, at this point I'm sort of just trying to figure a strategy to minimize my losses as opposed to maximizing my gains. All these financial news sites have so much conflicting information, often published minutes apart with contradictory headlines on the same page. It is baffling...

Glad to know I'm not the only one..

MK


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## invision (Aug 14, 2012)

Typically when stocks go down it is a safe bet to put your money to bonds... In 07-08 when we saw the start of the down we moved my wife entire 401k to bonds, we lost $6k waiting for it to go down enough to make the move... Then in 11 we switched back to stocks, so we have gained tremendously,,,, now as I have stated, I deal with financial institutions, and I can honestly say they can't tell me... Head bond trader is looking more stressed each day, while the equity side is buy sell buy sell big time, but that is typical, while the research team is starting to look like they did in 07


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## Immolatus (Feb 20, 2011)

I have to admit I dont know much about gubt bond funds. If the bubble bursts, the prices will drop precipitously, and the yield goes through the roof. So if youre holding them, you get creamed.
The 'yield' of 2.6% is losing out to inflation. Yes, youve lost out on returns in the market, but theres no point to 'what ifs', theyre just not healthy. I'm generally not a fan of loaning the gubt money in the first place so I would never do it personally, but nothing against anyone who does. I would be more partial to junk corp bond high yield funds for the yield alone.
Might as well get a much better return,and if everything goes to crap (if gubt bonds and corp bonds go south) then we got much bigger problems on our hands. And a lot of them pay out monthly, so you could at least be getting a check every month, or as I am more into, just reinvesting them.
A lot of these have been creamed themselves for various reasons in the past decades-bad economy, retirees pulling out, whatever-but something about this strategy intrigues me.
Take HYB for example. For $2200 (200 shares) it pays out $12/month, and if its reinvested, its buying you another share each month. Without doing the rest of the math, its getting you another $.06/month in dividend, so in less than 30 months without taking into account the extra dividends youre making, it has paid for itself and you got an extra 30 shares. Assuming it doesnt tank, of course, but 3 years ago it was $5.


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## Marcus (May 13, 2012)

MK,

Interest rates are at historical lows right now. What this means is CDs pay paltry returns and bonds pay returns that are *lower* than historical norms. These low interest rates are due to intervention in the marketplace by the Federal Reserve (through QEx) which sets the overnight rate which banks pay to borrow money and directly affects what the banks charge on loans. The Fed chose to lower rates to stimulate economic activity and avoid an economic collapse in '08. A side effect of this lowering was to reduce bond interest rates over time in an effort to make equities more attractive for investors. These low interest rates have extended the bull market in bonds.

So what does this all mean?

*If* interest rates remain low in the future, it means nothing. But should interest rates rise, current bonds will fall in value to the point where these bonds generate the same returns as new bonds. What this means is that current bonds (and bond funds) have a *capital risk.* That means that you can lose some of the capital you invested in the fund. Due to the historical low interest rates right now, the capital risk is substantial if we return to more normal interest rates. How substantial? You could lose anywhere between 10%-50% of your investment if interest rates rise very much.

Since some economists believe we are finally coming out of the recession, they are projecting increased economic activity which will lead to higher interest rates. Thus their advice is to rotate out of bonds and into equities. Personally, I have already rotated out of bonds but I parked my $$$ in a money market fund. It still has some of the same risks as a bond fund, but I don't foresee any great bull run in equities. That's one of the reasons I chose to purchase some PMs so as to store my wealth.

Looking at the choices you've listed, I see no money market or cash option. I'd probably look at the real estate fund and the vanguard index fund (depending on expenses) with the idea of watching both closely.

I hope this helps.


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## Tweto (Nov 26, 2011)

Just a few hours before reading this thread, I sold one of my bond funds that I have owned for the last year. It had been making 6% last year and then the last month has lost money.

I do believe that there is a bond bubble and when it bursts, people owning them could lose 10% before they can sell. I still have about 30% of my money in bond funds and those are still making money.

Equities are close to a all time top and uneducated investors think now is the time to put money into stocks, bad idea, just because the markets are doing good is not a promise that it will continue. The best time to invest in stocks was 2008.

My position right now is to watch the financial markets very closely and be ready to make changes fast. I have 30% in gold, 30% in bond funds, and 40% in cash. 

If the stock markets have a 15%-25% correction then I will dump some money into stocks. Of course this will all change if we have any world catastrophes.


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## hiwall (Jun 15, 2012)

If interest rates do rise(which has to happen sometime) how is the USA going to pay the interest on its huge debt?


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## invision (Aug 14, 2012)

Hope that gold is in hand!!!

Actually in regards to the equity side, since we are in a bull run right now.. the question comes to the point of how much run does the bull have???  We have seen a good jump since 2008, and your absolutely correct - when the market is going down, or is down where you think it is the lowest - is the time to buy buy buy! However, bailing before it reaches the return of the bears - is losing money too... If you got out 6 months ago, then how much have you lost in comparison to being in bonds or Gold instead...

However, I can agree with bond bubble, and I also think we have a equity bubble starting to show up, and everyone knows we have a government debt bubble that keeps getting larger...

So back to investing, my wife 401K is 100% in the equity right now... split between US and European stocks.. So, right now she is still gaining, because the bulls are still running... However, with a looming bond bubble, and potential for a second recession, etc - How much more can the bull run before the bears come out... and when they do, where to put the money - I like the idea of PMs - however they aren't in hand.. so do you really own it, how great is the chance what it says you own, they don't have it...

So, we are approaching 14,000 - The all time high was October 9, 2007 @ 14,164.53 - RIGHT BEFORE THE BUBBLE BURST. Now the question is where is it going to top out at? When the bubble burst for housing, one of my clients actually had a pool running on how far it would drop... I think this current run is actually going to hit 14,500 before it goes down... I am basing this on bubble theory... I think it will take 1 year to actually get up to the 14,500 and I am thinking that will start the sign that the party is over with the run, and potentially the other "bubbles" are starting to happen...

Yes, I think the bubble is going to burst around that time... my reasoning is things are starting to come to a head... whether any one them actually happens - I call them trigger actions. A trigger action - gun laws go through and are signed.. I don't think the US Gun Owners are going to like it at all... I think this could start a lot of issues... I don't think single step immagration will be that biggie, but I do still think the Iran and N Korea nuclear programs could also kick off a trigger... Isreal\Egypt is still an issue... who knows what other items are out there brewing right now? 

I remember at one of my asset management clients, deciding to do a $100 buy-in "how low will it go" pool... I picked 6500... the next highest was 7500, the lowest was me!!! and there were 25 people in (including me)... By November 20, 2008, it fell to 7,552.29, a new low. Then it started going up, so being toward the end of the year, they declared this the low and paid out the winner - However, this was not yet the true market bottom. The Dow climbed to 9,034.69 before screeching down to 6,594.44 on March 5, 2009. BTW - a trader won, when it hit 6500 - I said I wanted 1/2... he refused... I shut him out of the system, he paid me after running to the ATM... I turned access back on for him. 

So how low will it go too??? The market during the 2008-2009 recession/depression lost 53.44% value... I think this time, it could be a lot worse - 70% maybe even higher?!?! So I am picking 3,625 for the next low...


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## cqp33 (Apr 2, 2012)

@invision, wow 3,625 for the next low! That would be brutal as all hell on many people, a lot of money lost! The next question is how long to recover from that low? I believe the next recovery will take decades because something will be have to be done about debt as whole. Including government debt, personal debt, corporate debt and our future debt for social security/medicare/medicaid to mention a few. We can also mention inflation here too, take into account the amount of federal employees we have gained and when the government debt bubble pops unemployment will be high as hell! Doesn't look good when all this happens, can it all happen at once or will they happen over time? I personally believe that once one pops the others will come crashing down, when that happens your low mark might be spot on or maybe even too high!


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## Tweto (Nov 26, 2011)

invision said:


> Hope that gold is in hand!!!
> 
> Actually in regards to the equity side, since we are in a bull run right now.. the question comes to the point of how much run does the bull have??? We have seen a good jump since 2008, and your absolutely correct - when the market is going down, or is down where you think it is the lowest - is the time to buy buy buy! However, bailing before it reaches the return of the bears - is losing money too... If you got out 6 months ago, then how much have you lost in comparison to being in bonds or Gold instead...
> 
> ...


I was 100% in tech stocks in the 90's and completely got out in 2000. After I got out, I beat myself up for getting out while the markets were still climbing. About 6 months after this the bubble burst and the markets collapsed. From that point on I decided to never be shy about getting out of the markets. 90% of the people I knew lost a lot of money at the time and I had done pretty well. BTW those same people are still working today and have told me that they will never be able to retire. That decision to get out in 2000 gave me the money to retire on today. The saying "pigs get fat and hogs get slaughtered" has special meaning to me.

invision;
Your estimate of Dow 3,625 scares most people but on researching the markets history, I think you could be right. I do believe we are entering a very bad economic time that will last 10-20 years. When the markets do collapse, a lose of 10-20% could be possible in the first 3 days.


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## MountainKing (Jul 26, 2012)

Thanks for all the great thoughts and insights. 

I keep laughing every time I read the news stories. I think Mario Draghi was on the news yesterday saying how Europe was out of the crisis zone now and on the way toward recovery.

Just under that story was the one about Spain's unemployment rate topping 26% and the youth rate is topping 55%. Hmm..if that is "turning the corner" I'm sure those unemployed will be thrilled!

I don't know - I feel like I'm stuck between a rock and a rock with my options. I wish there WERE a gold fund or something similar in my program. I wonder if the emerging markets option would be any better a choice. 

Hard to know what to do.

MK


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## Marcus (May 13, 2012)

MountainKing said:


> I wish there WERE a gold fund or something similar in my program. I wonder if the emerging markets option would be any better a choice.
> 
> Hard to know what to do.
> 
> MK


Don't we all wish for a PM fund we could invest in. 

I'd recommend not going into emerging market funds since they're likely to fall even more than US equities due to what those countries produce.


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## BillS (May 30, 2011)

hiwall said:


> If interest rates do rise(which has to happen sometime) how is the USA going to pay the interest on its huge debt?


That's easy. The Federal Reserve just prints the money. That's what they've been doing to one degree or another since March, 2009.


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## BillS (May 30, 2011)

Bonds are going to collapse because the US is going to experience hyperinflation. The Fed is creating $50 billion a month out of thin air. It's only a matter of time before we have hyperinflation like Germany had in the 1920s. 

I wouldn't have any money in bonds regardless of what the yields or how safe they appear to be. I'd have some money in cash and the rest in precious metals. According to shadowstats.com, the real inflation rate is about 10%. That means any safe bond investment actually loses money when you account for inflation.


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## cqp33 (Apr 2, 2012)

@invision - the market is almost at 14,000 right now, do you still feel that your mark of 14,500 will take a year to get too and do you still think that will be the new fall mark? Just curious. Wondering if the party is going to end before we think it will!


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## invision (Aug 14, 2012)

Tweto said:


> I was 100% in tech stocks in the 90's and completely got out in 2000. After I got out, I beat myself up for getting out while the markets were still climbing. About 6 months after this the bubble burst and the markets collapsed. From that point on I decided to never be shy about getting out of the markets. 90% of the people I knew lost a lot of money at the time and I had done pretty well. BTW those same people are still working today and have told me that they will never be able to retire. That decision to get out in 2000 gave me the money to retire on today. The saying "pigs get fat and hogs get slaughtered" has special meaning to me.
> 
> invision;
> Your estimate of Dow 3,625 scares most people but on researching the markets history, I think you could be right. I do believe we are entering a very bad economic time that will last 10-20 years. When the markets do collapse, a lose of 10-20% could be possible in the first 3 days.


Being in tech industry in late 90s, I was also heavy in tech, but wise tech - Cisco, Microsoft, even a little apple... I held those stocks, so did my dad... Although I did buy several IPOs and got banned from two trading platforms for selling IPOs on day 1 - buy, sell, make a profit... It's funny in a way, I left LexisNexis for a startup VPN company in late 99, I got ticked at my boss, put my resume on monster... Had 75 calls in a week, did 7 interviews, got 7 offers, took the million in stock options signing bonus with a $35k increase in base... Left that company in 3 months - they were burning VC money, no clients, and they were public ally traded??? Went to a brick and mortar consulting company as their IT Director with a $5k pay cut and gave up the million in stock... Didn't matter 3 months later that startup was bust. My moved saved me, i ended up being the only non consultant stock owner, the only non consultant that received 5%+ pay raises, and 25% bonuses after 6 months...

My eye opener for the start up besides finding out I was working to get first client online was a tech company across the hall, people showed up to work and the sheriff had chained the door, as they were all standing around, their CEO sent out a text message that read something like: "if you showed up to work today, you will see that we are now closed... I am sorry to say you no longer have a job..." Via text message. 1 week later I handed in my resignation... The CEO even flew in 2 days later begging me to stay cause I had completed the first client...with 5 more lined up...no way.

Thanks Tweto - I think?!? A 3,625 is a horrific drop... When it hits 9,000 that is my sign that SHTF cause it is just going to keep dropping... Although I can't have stocks now, my parents have a large portfolio - example my dad bought 500 shares of Microsoft in year 1, same with Cisco, same with Apple... He still has every stock plus all the splits... And that is just 3 of 50 stocks he owns... When I was in college at UDayton, I told my dad to buy NCR... He thought I was crazy... Two weeks later NCR stock jumped 24pts because AT&T bought them... Now he listens 75% of the time... I told him, when I call to sell, sell. He trades through his local bank (weird I know but he likes the fact the bank CEO meets him at the door -- can you say ego?) anyway, he is to sell and buy all PMs in hand available, including walking into the 3 local jewelry stores and buying rings, necklaces, etc...


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## MountainKing (Jul 26, 2012)

So what is the general consensus about borrowing against your 401(k) and reinvesting the money in something outside of the limited boundaries of the 401(k) program? 

I'll start with saying - I've read all of the disadvantages to doing so. You can borrow up to 50% of your total 401(k) balance. The interest rate is fairly good, and when you repay you are actually repaying yourself the interest in principle. The loan origination fee is very low ($50). The cons, of course, are that if you fail to repay the loan I think they count it as a disbursement instead of a loan, so you get the 10% penalty, plus taxes, which I would assume gets deducted out of the remaining 50% of the balance that is left. You also make no gains on the "missing" part of your 401(k) if the main fund rises in value. With that said, I'm making such measly returns (but safe) on the bond fund that that reduction in gains isn't really that significant.

So - if someone were feeling a little risky, and their conviction was that the market was indeed going to head south soon - you could play some shorting ETF or something with the loan from the 401(k). With a very, very tight stop. Gamble? Yes. But with my limited options for preserving my cash within the 401(k), and a real feeling that that money might evaporate (50%?), what do I have to lose? (OK - I know what I have to lose, perhaps 60% or more of my 401(k) - haha..)

So - tell me why it is a good idea and why it is a bad idea. opcorn:

MK


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## invision (Aug 14, 2012)

MountainKing said:


> So what is the general consensus about borrowing against your 401(k) and reinvesting the money in something outside of the limited boundaries of the 401(k) program?
> 
> I'll start with saying - I've read all of the disadvantages to doing so. You can borrow up to 50% of your total 401(k) balance. The interest rate is fairly good, and when you repay you are actually repaying yourself the interest in principle. The loan origination fee is very low ($50). The cons, of course, are that if you fail to repay the loan I think they count it as a disbursement instead of a loan, so you get the 10% penalty, plus taxes, which I would assume gets deducted out of the remaining 50% of the balance that is left. You also make no gains on the "missing" part of your 401(k) if the main fund rises in value. With that said, I'm making such measly returns (but safe) on the bond fund that that reduction in gains isn't really that significant.
> 
> ...


Wow... Um.. Your talking about borrowing money to make money, and if your thinking to do so because of future economic collapse,then besides what you will pay in taxes from the money you MAY earn from the ETF? Here is a major downside... If you are let go prior to your paying it back in full, then it will be counted as a withdraw from your 401k and count at earned income... Depending upon how much and your current salary it could shift you into a higher tax bracket...

Now, another gamble - borrow a smaller amount, buy in hand silver and gold... Once you have it paid back, do it again... Your hedging on PMs going up, always borrow what you can give back ASAP... For example you have $2000 in savings, and $50,000 in 401k, borrow $3500 or $5000. This way if there is a down turn and you are let go, you will have to pay back the amount, but would this small amount shift you into a higher bracket tax wise if you chose to convert to a cash out? In the mean time you have increased your PMs on hand...

What do you all think of this strategy?


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## MountainKing (Jul 26, 2012)

Well, technically I'd only be borrowing money that I already have - the only difference is that I'm borrowing pre-tax, pre-penalty money. Even the interest I repay on the "loan" goes right back to my account, so it isn't like I'm paying someone else to use the money. Good point about the higher tax bracket though - but I'm 99% confident that I'm not going to lose my job any time soon (our company is expanding, just built a new building for us, lots of other signs that money is not a problem at the company). 

That is a good strategy though to do it in small chunks like that. Of course, I could just do that with my current paychecks too. The only drawback to doing it from the 401(k) would be the recurring $50 origination fee. My thought was to just put that 401(k) money to work for me (well, risk it) since it isn't doing anything much right now (3% in a bond fund that might implode soon). 

MK


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## invision (Aug 14, 2012)

Your company may be doing well right now... since you didn't say the name, I really can't tell you the risks (if it was publicly traded or DB feedback)... However, I guess I am not an optimist right now in regards to the overall economy in a global perception. I don't think the US has more than 4-5 years left before the "can" being kicked down the street won't find a brick wall... when that happens, even the strongest of companies - Microsoft, Apple, GE, etc will be having massive layoffs - oh it will start small but quickly gain momentum. For instance - I just found an article talking about Social Security Disability Trust running out of money before Obama is out of office... that because he has made it easier for people to get on SS Disability over the past 4 years, the numbers of people filing applications has almost doubled in the past 10 years... Link: http://www.foxnews.com/politics/201...-cover-all-benefits-early-as/?intcmp=HPBucket

What I find scary is this paragraph...

_Because the programs are funded through payroll taxes, money will continue to pour in as long as the country has workers. But with the country's large aging population expected to collect more and more from the programs than younger workers are contributing, analysts are worried that at some point the programs will no longer be able to pay full benefits as promised -- unless changes are made, presumably either raising taxes or cutting benefits._

So, my next question to you would be, what you borrow from the 401K could you pay it back in full within 1-3 years??? I think it would be high risk to gamble it for a high dollar value... I would go for something you know you could repay quickly... $5,000-7,000-10,000 and buy in hand gold/silver... IF gold or silver climbs up - considering some are saying it is being manipulated price-wise lower than it should be, if it does rise up, say from $1600 to $2200 an ounce, you would be making money... if your job was terminated a year down the road, then if you bought gold in 1/10 ounce increments then sell what you need, you would still have a profit on your money with what is left over, or say to heck with it, and let it flip to where it is considered a cash out and take the tax penalty...


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