5 reasons bonds may be less safe than you think

AP News
|
Posted: Oct 01, 2014 12:06 PM
5 reasons bonds may be less safe than you think

NEW YORK (AP) — Burned by the stock-market crash during the financial crisis, investors have poured a trillion dollars into bond funds in the past six years. They like the interest payments that bonds throw off, and that their prices barely move day to day.

But some experts say danger signs are flashing, and prices could fall fast.

Here are five reasons bonds may be less safe than you think.

HIGH PRICES: Demand and prices have soared for nearly every kind of bond, even risky ones sold by companies with shaky finances, and cities and states struggling with crushing public-pension bills.

BIG INVESTORS RETREAT: The biggest owners in many bond sectors are small Main Street investors. They are more easily spooked than traditional holders like insurers and pension funds that help stabilize the market by sticking with their holdings through booms and busts.

MISSING MIDDLEMEN: Banks have largely abandoned their role of keeping the corporate and municipal bond market "liquid" by matching buyers and sellers and occasionally buying and selling themselves.

THIN TRADING: The average corporate and muni bond trades a third to a half less than it did in 2006, so prices may now fall fast on a few big sales.

RATE HIKES: This market faces a big test next year when the Federal Reserve is expected to start raising interest rates. When the Fed raised rates in 1994, bond prices plunged, a big hedge fund collapsed, companies like Procter & Gamble got hit with losses and Orange County, California, had to file for bankruptcy.