The Bond Bubble

Trillions of dollars of investment wealth has been funneled into a black hole of debt, over the past five years, in a frantic search for a decent return on capital and what has been perceived as a relative low risk asset compared with other asset classes. Indeed, the trajectory of the bond market has followed pretty much one direction over the past five years; that’s up and up and up.  To quantify this in money terms, had you invested say, 10,000 pounds sterling in an average strategic bond fund five years ago it would be worth today approximately 15,500 pounds sterling. 

There are several factors which may have caused the bond market to behave like it was on steroids. For example, following the financial crisis of 2008 there was a flight to safety away from riskier asset classes. In other words, there was a net capital inflow into bonds and a capital outflow from equities as investors reconfigured their portfolios to reflect the, then volatile financial environment. So the demand for bonds over more risk alternative  asset classes, such as equities, drove bond prices higher and interest rates lower; due to the inverse relationship between bond prices and yields.

The lower interest rates also meant lower returns for investors on their high street bank deposit accounts. This made alternative less risky investments such as bonds more financially attractive, which in turn drove up the demand for bonds and their price.

Moreover, expansionary monetary policy was rigorously implemented by the US Federal Reserve and the Bank of England during the financial meltdown of 2008 in an attempt to choke off a depression. This is supply side economic thinking favored by centre, centre-right governments. The idea is to stimulate the economy, or in the case that preceded the financial collapse of 2008 crank start the economy back to life by lowering interest rates.  The lower interest rates, it is believed, would stimulate business investment, thereby reducing unemployment.   So the Reserve banks also stepped in with Quantitative Easing (QE). In other words, it also bought bonds with the intended aim of keeping interest rates low. But this policy also drove bond prices up and resulted in low yields.

The real fear now is that the policy adopted by the reserve bank, while it may have been successful in halting temporary a severe stock market crash, a bank run and a maybe even an economic depression, may also have inadvertently created a new bubble in equities, London property prices and the bond market.

Indeed, it is the latter, the bond market that is starting to look precarious. The tell-tale symptoms of “yield chasing”  by investors which has been aided and abetted by years of Quantitative Easing “funny money” and interest rates that have remained near zero and most recently even negative. The European Central Bank (ECB) will now be charging banks to keep their money in overnight deposits. Perhaps it is this perverse combination of yield chasing and funny money that is skewing investors’ perception of risk versus rewards. In Wall Street speak it has been described as “picking up nickels in front of a steamroller,” the risks are far outweighing the rewards. The glut of investor cash is being tossed into the bond market in the hope of sniffing out a decent return and bond investors have become oblivious to the risks.

Perhaps this is why investors have scrambled on board to buy Greek bonds. Surely the sight of investors celebrating the return of Greece to the bond market somehow underscores the problem.  Candidly, Greece’s economy remains a basket case, its economy lies in ruin after six years of depression, 27.5 percent of the workforce is unemployed, and the official figure may be even higher. Its youth are squandered with 58.3 youth unemployed. Its economy has shrunk by almost a quarter since the financial meltdown of 2008. Moreover Cyprus, the country that was hitting bank deposits and imposing capital controls just one year ago has most recently returned to the bond market.  Cyprus’s credit rating remains deep in junk territory and it is also plagued with high unemployment.

But flocking to high risk European sovereign bonds doesn’t truly reflect the improved state of Europe, but rather investors’ irrational exuberance fueled by cheap money and a ECB that now actually charges Banks for depositing their funds.

So perhaps this is why Bank of England Governor, Mark Carney, is proposing to do the reverse of the ECB and has surprised the markets by flagging up the prospect of rates rises from its historic low of 0.5 percent.  Even though it may seem premature to discuss the prospects of rate rises, while the British economy appears to show signs of clawing its way out of the longest recession in history the recovery is relatively fragile and unbalanced.  The economy still has excess capacity, inflation is low, growth in nominal wages is feeble and youth unemployment also remains stubbornly high at 35.9 percent among those aged 16-17 years.

It would appear that Mr. Carney is now more worried about financial stability than economic growth.  The BOE’s proposal to raise rates maybe intended to deflate the bond bubble and reduce leverage in the system. In a financial crisis liquidity vanishes and the price of risk goes through the roof. So a more leveraged system where credit is cheaply available is likely to face a greater disruption to the system when a crisis hits.

But when interest rates rise, bond prices fall. What happens when bond holders in volume decide to sell, who will buy this debt?  Perhaps this will be the catalyst to a bond bubble burst. But this would not only wipeout a chunk of life savings for those who invested in bonds via their pension schemes but it could also create another credit crunch, worse than that of 2008. This is maybe why Federal Reserve is considering imposing punitive exit fees on anyone trying to take their money out of bond funds to halt a run on the investments.

But a really question worth pondering over is what does Mr. Carney know that we don’t, why is he so prepared to sacrifice a fragile recovery for financial stability? “There may be trouble ahead, let’s face the music and dance.” 

Historically Low Bond Yields!

The main weapon, and the one that Central banks are most comfortable with, was to use low interest rates in the battle to regain stability following the financial crisis.  However, the level of interest rates that is most appropriate is dependent on other factors too such as demand and supply, inflation, period of investment and the level of risk being taken. 

One of the safest investments, before the crisis, was to lend to governments because they were expected to always be able to repay the investor at maturity, whilst lending to companies is perceived to be less safe. The reward or interest rate paid for holding government stock was lower than that gained from holding company bonds before the crisis but reversed when investors feared that their investments in some government stock was now in doubt. Blue chip companies, on the other hand, were perceived as remaining relatively safe. The reward for holding company stock became lower than that demanded for holding some government stock such as that issued by Greece, Italy, Ireland, Portugal and Spain although they are part of the European community.

Central Banks brought the benchmark interest rates down to very low levels in the early stages of the crisis, leaving investors with funds in cash savings earning a very low return on their money. Slowly these investors realised that interest rates would stay low for a long time and some moved their investment profile into higher risk investments where better returns could be achieved.  The less sophisticated investors utilised collective investment vehicles to get the better returns that they needed while the professionals judged that the protection of central Banks may justify investing some portion of their assets into the very high yielding stock such as that issued by the PIIGS countries who were, after all, protected by the ECB.  Whilst this analysis was in doubt for a very long time as the politicians sought to increase the controls over the peripheral countries’ finances with implied threats of removing that protection unless they fell into line, it has proved a great success for these early investors with high yields and capital returns.  

The increase in liquidity created by the central banks of America and United Kingdom had to find a home and income became the main target for these funds.  This was found, not only, in the bonds issued for the debts of the PIIGS but also in the debt of emerging markets.  Issuance in these areas is relatively low and the huge level of funds chasing yield soon pushed prices up and yields down but in many cases yields remained higher than that obtained in the main bond markets in the US, UK and Germany.  The gradual subsidence of fear in the market added to the attractions of these relatively high risk but higher yielding investments.

Most investors in the bond market are and remain the institutions that need to match their liabilities with their assets because they need to ‘know’ that they will have the funds to match the liability when it arises.  These funds will continue to buy bonds with the right maturity and can, at present, justify the low yields by ensuring that they are higher than the low level that inflation is or than cash returns.  The other funds that buy these bonds are those of collective funds who are satisfying the needs of the retail investor for a return that is better than that obtained from cash.

Prices and yields traditionally move in opposite directions with interest rates being the key driver of short term bonds which would be expected to rise along with key interest rates, whereas long term bonds are more affected by inflation expectations and economic growth. If inflation is expected to rise and economies are growing the yields of longer term bonds will rise and prices will fall.

Short term bonds will be impacted by the shape of the yield curve which is a graphical representation of the yields that are currently available at the various maturities.  It is based on the idea that there is a connection between a bond’s maturity date and yield.  Historically shorter term bonds have offered lower yields while long term bonds would produce higher yields so a “normal” yield curve would begin in the bottom left of the graph and arc up towards the top right of the graph.

The ECB bank rate is in the bottom left hand corner at zero which causes all other short term rates to be dragged towards it.  Inverted yield curves have been indicators of a slowdown in economic growth, low inflation and further expectations of interest rate cuts.

The financial crisis has led to a period of low inflation expectations and central bank rates so that yields are low from the short dated bonds through to the long dated issuances.  The demand for yield has resulted in the issuance of more long dated bonds which gives the investor the advantage of covering longer dated liabilities and of giving a higher level of income.

Liquidity has remained in the hands of corporates and retail investors and their demand for low risk yield has created the funds to meet the supply of funds from governments.  The slow rate of growth in profits and weak retail and business demand for goods and services has perpetuated this very low yield environment. The policy being followed, however, is designed to reverse this situation and when it does yields will return to more normal levels.  The US is reining back on this accommodative stance and the UK has already stopped fuelling liquidity with more funds.  In Europe the ECB still has more to do to combat deflation and increase growth so we may expect to see yields rising in the US and UK over the medium term but remain low in Europe.  Subject to inflation remaining low across these areas this should increase the attractions of the US Dollar and Pound when compared with the Euro.

The Ukraine Crisis part2

The Ukrainian crisis continues to remain vivid on investors’ radar as fatalities on both sides regretfully increase. “We are as close to civil war as you can get,” declared Russian Foreign Minister Sergei Lavrov, early this week and in the same breath he urged both sides to find a peaceful solution.

But with both the US and Russia pointing the blame at each other for stirring up the conflict between the Ukrainian government supporters and pro Russian activists there appears to be no respite in sight to this ongoing crisis.  The USA is pushing its EU allies for greater sanctions against Russia but with the EU’s economy having emerged recently from a severe recession and in a fragile state there is no real appetite for this. Europe’s powerhouse, Germany is not keen on any meaningful sanctions, as it is heavily reliant on Russian oil and gas.       

                                                                                       

Meanwhile, the British are calling for a diplomatic solution to the crisis, bearing in mind that at the centre of Russian oligarch wealth lays British tax havens and multimillion pound London properties. So the British too don’t want to slay the goose that lays the golden egg, certainly not in this fragile economic environment.

Russian leader Putin has probably worked out that he is dealing with the weakest western elite in a generation and he might just be testing how far he can push the redline.  First it was Georgia, then Crimea and still no clear redline from the West so Russia may just keep pushing on for more territory.

Moreover, it is not only Russian expansionism that’s ruffling the USA feathers. Since 2007 Russia has been working on a plan, an Independent Ruble system, a financial system based on Russian resources, its own economy and backed by its own gold reserves.   In other words, a Russian economy independent from the US dollar and the whims of speculators.      “Russia, at its present stage of development, should not be dependent on foreign currencies; its internal resources will make its own economy invulnerable to political wheeler dealers,” said a Russian central bank official.

But Putin may be just too ambitious for Russia, a threat to US supremacy and the powers to be in Washington may think it’s time to topple him. So the economic assault on Russia has begun.

Already capital outflows, money leaving Russia has amounted to approximately $50bn since the start of 2014, this full year figure could be as high as $130bn, according to a Goldman Sachs report.  This net capital outflows in the first quarter alone was more than during the whole of 2013, according to a recent report from Alfa Bank.

On the foreign exchange market the repatriation of foreign capital from Russia represents investors selling Rubles and buying either dollar or euro assets, depending on where they reinvest their funds.                                                                      Additionally, in a climate of geopolitical uncertainty the Russian public is also flocking to what they perceive to be safe haven currencies. For example, the demand for USD rose 48% in March compared with the prior month, while interest in buying euros rose 50%.

The resulting outcome of capital outflows from Russia has been the inevitable depreciation of the ruble, due to the fact that there have not been inflow of capital entering Russia equal to, or greater than the amount leaving Russia.  So the negative net inflow of capital has caused the ruble to topple in value against a basket of currencies. The ruble has already depreciated 6.5 per cent against the US dollar this year

Russia’s economy is heavily reliant on the exports of it natural resources namely its oil and gas, which are priced in rubles. Moreover, about 50 percent of the Russian population is sucking on the state’s teat, employed either as civil servants, teachers, public health care worker, pensioners and people on benefits, all of whom rely totally on the state’s income.  A devaluation in the ruble means less income earned to pay for its large public sector.  A crash in the value of the ruble would see Putin’s budget explode. Perhaps Putin’s great danger is that he may have been budgeting for oil at over 150 USD a barrel at a higher ruble exchange rate to finance public spending   

Furthermore, the private sector is relatively underinvested and internationally uncompetitive. The Russian economy is not in a buoyant state. In 2013, Russia’s economic growth slowed to 1.3 percent, its weakest pace since Putin came to power in 2000.

Russia’s Central Bank would not want to raise interest rates in an attempt to support the ruble because this would choke private business investment by making borrowing costs more expensive, which would not be desirable.

Instead, in a desperate attempt to support the currency the Russian Central Bank decided to sell a record $11.3 billion in foreign currency to buy rubles. But it yet remains to be seen if this policy, in the long run, will be enough to halt the tide in the falling ruble. Will the Central Bank throw in the kitchen sink by selling off their gold reserves to support the ruble?  

If so this could result in downward pressure on gold prices.  

As if a depreciating ruble was not enough to worry the Central Bank, the collapse in demand for Russian debt, bonds has result in falling Russian bond prices on the secondary market and simultaneously pushed up bond yields. Secondary market bond volumes have fallen on the Moscow exchange by 43 percent.

Losses are raking up on funds heavily exposed to Russian assets. Moscow-based Prosperity Capital Management which has $3.3 billion in assets under management fund has fallen 16.2% this year.

As one hedge fund manager put it, “It's a very fast world now," said Nicolas Rousselet, head of hedge funds at Swiss-based investment firm Unigestion.  Funds have a position for "one hour, and you take it off."

Darren Winters

Being smart with your cash

In today’s environment of low interest rates it is becoming increasingly difficult for savers to find a home for their cash which produces a meaningful rate of return. Accounts traditionally regarded as “risk free” are increasingly producing diminishing rates of return especially once inflation is factored in. Even when one has been lucky enough to identify an account offering higher rates than are typical, these often disappear before investors are able to take advantage of them, as banks limit their availability. Often the higher interest bearing accounts that are available require savers to tie their money up for a period of time after which the account defaults to a significantly lower rate. Banks rely upon the inertia of savers to move their account to take advantage of better offers once this fixed term has expired. This inertia can be due to a number of factors: either they have forgotten when the fixed period ends, they are too lazy or busy to look for another account paying a higher rate, or in some cases they have forgotten about the account.  According to recent research by Which?, savers are losing £4.3 billion a year by not moving their money from extremely low interest bearing accounts known as “zombie” accounts which used to pay good interest rates but now pay next to nothing. Apparently 8 out of 10 easy access savings accounts pay very low rates of interest and 4 out of 10 pay 0.1% or less.

Being smart with your cash takes effort. If you want your money to work for you then you have to be prepared to put the work in too. For savers with access to the internet there are many useful websites that can help in the search for the best rates available such as Moneyfacts.co.uk, GoCompare.com, MoneySupermarket.com, ThisIsMoney.Co.UK and CompareTheMarket.Com. For those who do not have access to the internet many Sunday Newspapers have a Money Section which lists the best rates available for savers, however this is not as comprehensive as the internet listings. Beware as some accounts provided by the same institution seem to have similar names but pay very different rates.

Four important considerations when choosing a home for savings are:

What is your tax rate?

How much are you planning to invest?

For how long do you plan to invest the money?

Do you intend to reinvest or withdraw the income?

Not all accounts are straightforward. Some require a monthly fee while others require savers to keep a minimum balance in the account. Additionally there could be rewards associated with some of the accounts which entitle savers to cashback provided certain criteria are met. This can mean that an account which levies a monthly charge could actually work out more beneficial provided the reward criteria are met! The websites allow comparison of the various accounts that are on offer and usually have a link to the providers’ own website from where more information can be found and allow online application.

If savers are not expecting to access their funds and would like to shelter the interest from tax, particularly useful for higher rate tax payers, then investing the money into a Cash ISA is a useful option. Interest rates tend to be a little higher on money that is tied up. Higher rate tax payers who have already utilised their ISA allowance could always put additional savings in the name of their partner if they are lower rate tax payers.

Savers need to take into account accessibility and ensure that the funds are not tied up for a fixed period if the money is likely to be needed within that time frame. Some accounts have a withdrawal limit so make sure that any potential calls on the savings fall within that amount.

It is important to ensure that the same type of interest rates are being compared. There are two versions that banks quote – the Annual Equivalent Rate (AER) which takes into account compounded interest over the year and the Gross rate which is the flat amount paid over the year. Both rates are usually quoted before tax. Some accounts will pay a bonus rate after a certain period.

There are other investments which are considered to be “safe” such as Premium Bonds and National Savings Income Bonds. There is no set term with Premium Bonds and sums between £100 and £30,000 can be invested. Instead of paying interest there is a prize draw every month with a £1 million jackpot and other cash prizes. All prizes are tax free and the funds can be withdrawn at any time with no notice and no penalty. The drawback however is that unless you are a winner in the draw your money is at the risk of erosion from inflation over time. Income Bonds allow investment from £500 to £1 million per person and again have no notice or penalty attached to them. The rates are variable and are currently set at 1.25% gross/1.26% AER. Further details of both accounts are available from the Post Office or online at nsandi.com.

One of the most powerful tools when investing is compounding. Re-investing the interest that is paid means that savings will grow quicker because you are not only earning interest on the original savings but also on the interest that is paid. For example: Assuming £100 per month is invested for 30 years at an annual interest rate of 3% this will produce interest amounting to £36 per year. At the end of the 30 years £1,080 will have been withdrawn and the amount saved will amount to £36,000.

However, if the interest is not withdrawn, then the amount that interest is paid on, rises each year. So instead of £36 interest being paid out in year one, this amount is added to the balance increasing it to £1,236. In year two, 3% interest is paid on this amount totalling £37.08, which is added to the balance, and in year three 3%  is paid on £1,273.08 and so on, until after thirty years of saving the balance reaches £58,273.68. This is 61.87% more than if you had taken the interest each year. Compounding can give a huge boost to savings from a small base.

Always remember not to invest more than £85,000 per person in any one financial institution as this is the limit for compensation under the FSCS should the bank collapse.

Darren Winters

Bonds Versus Shares .... Which Is The Right Option For The Investor?

Should you be investing in bonds or shares? That’s a tough question to mull over.  Let’s take a look at both financial instruments.

Bonds are supposedly less risky to invest compared to shares. This is so because in the unfortunate event of business insolvency/bankruptcy, the bond holder (investor in bonds) comes ahead of the equity shareholders in terms of payouts should the entity be made insolvent. On the other hand, the equity investor is last in line to be paid and more often than not business failure to an equity investor equates to an almost certain loss of their entire capital that he/she has invested in the failed business. With respect to bonds, the bond holder is promised by the party receiving the money (the Issuer), to repay the face value of the bond (the principal) at a specified date (maturity date.) In view of this, it becomes apparent that capital is more exposed to risks when it is invested in shares rather than bonds.  

In terms of providing an income there is also a distinction between shares and bonds. In the latter, the investor in bonds is often provided with fixed yields, the main advantage here being that he/she is able to predict income from their investments. This is an attractive feature for investors approaching retirement, when regular income from their investment is more favorable investment strategy than exposing their capital to higher risks.                                     

For example, if an investor where to buy a bond with say 10% coupon at its 1,000 USD par value, the yield is 10% (100 USD/ 1,000 USD).  That seems straightforward. But the investor in bonds needs to bear in mind that the price of bonds fluctuates on the bond market. So assuming the bond price goes down to 800 USD, then the yield goes up to 12.5%. This occurs because the investor receives the same guaranteed 100 USD on an asset worth 800 USD (100 USD/800 USD).

Conversely, if the bond goes up in price to USD 1,200, the yield shrinks to 8.33% (100 USD/1,200 USD).

Shares do offer income to the investor in terms of dividend payments, but income from this is not predetermined and can be unreliable.  Note that dividend payments on shares usually depends on the performance of the company throughout its financial year and the amount of income paid, if any, is recommended by the company’s board directors. So the investor has no real way of deriving a stable income from shares. In some years the shares may pay dividends, whilst in other years, little or no dividends may be paid out. 

Despite the uncertainty of income that shares offer investors their main attraction as an asset class is their potential to offer the investor capital growth. However, the general rule of thumb for investing is applicable in share investing, that being the higher the potential risk to the capital the higher the rewards received by the investor and visa versa.

In other words, there is a positive relationship between rewards and risks. 

If the investor is willing to forsake higher risk for the potential of greater returns, then equities may be the suitable financial instrument for him to achieve his goal. This is one of the main advantages of share investments compared to bonds-the potential of capital growth.  A young investor, a long way from retirement may prefer an investment strategy where their investments are more geared towards growth, rather than immediate income. This means that their investment portfolio may be orientated more towards shares rather than bonds.  So the investment goal of the investor could determine whether investing in bonds is more suitable than shares. 

Indeed, volatility is another distinction between the two financial instruments. Share can fluctuate widely on the future potential profitability of the business, on the expected earnings.  Technology stocks, pharmaceutical stocks investigating in new drugs for say cancer, or prospecting oil/ mining stocks share prices have the potential of gyrating widely on the stock market based on the prospects of positive events influencing the company’s profitability.  Investing in these types of companies before the positive event has been factored into the share price offers investor the potential of large capital gains. A photo looking like a bunch of long haired hippies, featuring micro soft founders in 1978, states, “would have you invested.”

 

If an investor were fortunate enough to have bought 100 shares at 21 USD in MicroSoft in 1986, an investment 2,100 USD, those shares over the course of nine stock piles would have mushroomed to 28,800 shares. Assuming the investor then sold those shares in December 1, 1999 he would have bagged a massive 1.4 million USD.  Sure, this is easier said than done, but no doubt this will probably wets the appetite for shares, even amongst the diehard cynics among you.    

Another bonus of share investing is that the investor owns a piece of the company. There are different classes of shares with different voting rights. Shareholders are invited to attend annual meeting of the company, they can vote on issues that influence the business, such as takeover and acquisitions of the business, changes to members of the board. Naturally, the larger the shareholdings in a company the more voting clout the shareholder investor has in selecting senior executives who will run the company and voting on import issues that could influence the business.   In contrast, a bond holder doesn’t acquire ownership in the business; they have no voting rights and no way of influencing the business.

So the theory goes that bonds are a supposedly the safer bet than shares-they are the more preferred asset by the grey haired people among us.  But so is gold considered the ultimate safe haven, the ultimate rat hole to climb into when things go pair shaped. Despite this common held view gold investors eroded 28 percent of their capital in 2013, it was the worse year for gold since 1981. Bond investors also experienced the worse year in living memory in 2013.  Indeed, playing safe last year has left some investors feeling very sorry for themselves, but will the appetite for risk continue into 2014…? 

Should You Be Investing In Bonds?

Bonds are an essential part of most investment portfolios for growing wealth and generating income.   In simple terms, a bond is a debt security where the investor lends money to an entity, which could be either a business or the state government or local municipality.                

The party receiving the money is known as an “Issuer” and the other party lending the money to the entity is known as the bond holder.  It similar to an I.O.U, with a difference that the Issuer promises to pay the bond holder a specified rate of interest during the life of the bond and also repay the face value of the bond, this is known as the principal when the bond matures or expires.  Note that bonds are also known as gilts, investments in UK public debt and Treasury securities, investment in US government debts. Bonds are traded on the financial market. 

Prudent investors follow the golden rule of investing, which is not to put all their eggs in one basket. In investment terms this means maintaining a diverse investment portfolio, balancing the risk-the potential of high growth with a stable income. The main advantage of bonds as an investment class is that the issuer pays the bond holder an annual income in the form of interest payments on the bond.  Usually, bonds pay out interest twice a year; hence the investor has some kind of predictability of income from their investments.

Investors approaching the retirement age prefer investing in assets generating a stable income, over alternative instruments that have a higher potential of growth but equally a greater exposure to risking their capital.  Bonds feature predominantly in investment portfolios where the objectives are to preserve capital, but also generate a stable income.  If you are approaching retirement and have an investment portfolio, perhaps you may wish to check with your financial adviser what percentage of your portfolio investments contains bonds.

However, keep in mind the general rule of thumb that all investments contain some risks and that there is a positive relationship between risk to capital and returns is equally valid to investing in bonds. Generally speaking the higher the return the greater the risk and vice versa. While bonds are relatively less risky than other assets classes there are a number of factors which can compromise the relative low risk ability of bond investments. For example, the price of the bond is based on such things as the creditworthiness of the issuer, credit ratings, supply and demand and liquidity of the issuer. The maturity date, a specified future date when the investor’s principal is paid, can also influence the bond price. When bonds are newly issued they normal trade at close to their par value, which is their face or principal value.   But as the bonds approach their maturity date their market price is more susceptible to macro-economic influences such as the state of the economy, interest rates and the level of employment. These factors cause the bond price to vary on the secondary market.  A bond is trading at a premium when its price is above its face value and alternatively when the bond is trading below face value it is said to be trading at a discount.As the name suggests a bond’s yield is the return on the bond, based on the price paid, known as the yield to maturity, and interest received also known as the current yield. Bond yields rise when prices fall and visa versa. In other words, there is an inverse relationship between bond prices and interest rates. 

 During the financial meltdown of 2008, in an attempt to choke off a depression, US Federal Reserve and the bank of England implemented an expansionary monetary policy. This is supply side economic thinking favored by centre, centre right governments. The idea is to stimulate the economy, or in the case that preceded the financial collapse of 2008 crank start the economy back to life by lowering interest rates.  The lower, interest rates, it is believed, would stimulate business investment, thereby reducing unemployment.  Whether the policy worked and has prevented another coming Depression is debatable. Critics of the government policy, known as Quantitative easing (QE) argue that QE may have created another bubble in asset prices.  Has this cheap money resulted in sky-high property prices in London, an equity market up 30 percent and a new bond bubble? QE involved pumping liquidity into the system by making cheap money available through the purchase of bonds, which caused bond prices to rise and the desired effect of lower interest rates.

But what has happen to these supposedly safe assets, bonds, are they a safe haven for investors today? During the peak of the 2008 financial crisis investors poured into bonds, away from equities and more risky instruments. They happily rode the wave that the then Federal Reserve Chairman Ben Bernanke had intentionally created in his attempt to lower interest rates by buying bonds, which pushed bond prices up.   However, since then investors have pulled a whopping record 77.5 billion USD from bond funds in 2013, according to research firm Trimtabs. Last year, 2013 went down as the worse year bond funds have ever seen. Chris Gunster, head of fixed income portfolio management for U.S. Trust is forecasting a difficult year for bonds in 2014, nevertheless, he doesn't think it is going to be catastrophic. In his explanation he uses the analogy of a helium inflated balloon resting on a ceiling. "Bubbles tend to burst, balloons just tend to glide down," he said.

But a “glide down,” scenario may be too optimistic. The recent announcement by Barclays bank to cut 19,000 jobs over three years, with the investment side to be most hit by the slowdown in the demand for government and company debts underscores just how bearish the bond market could turn in 2014. So even a relatively low risk investment, which appears to be a safe haven place to hide could still be detrimental to your wealth if you have bought into a bubble. The timing of your entry and exit are still also key.