Over the weekend, I met up with a couple of friends at a local bar. One of them was chatting intently with a financial advisor who had tagged along. The financial advisor was pushing the concept of bonds quite strongly to my friend. There was nothing particularly wrong with his arguments except for the fact that they were very one sided. Knowing how hard the bond market had run (bond funds have outperformed equity funds for a 23 year record of 30 straight months), I was reminded of the urban legend of the shoeshine boy giving tips to Joe Kennedy in 1929. It seemed a good time to check in on where the biggest bond market is today.

Bonds in general and US Treasuries in particular have had a good run since 2000 relative to the equity markets. That run is an extension of the bull market that has prevailed since 1981.

US Treasury bubble

Source: The Big Picture, chart from Bloomberg

With charts like this (and interest rates at record lows), it is easy to see why some smart investors may be getting a little nervous. The 30 year bond is trading at an implied inflation expectation of 1.93%…not an outcome anyone who remembers the 1970’s would like to bet on.

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Filed under: Fixed IncomeInflation/DeflationInterest RatesMarket CommentMarket PsychologyUS

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