Bond bubble fears grow as investors query debt valuation

GOVERNMENT bonds are increasingly overvalued, according to a growing majority of personal finance advisers, stoking fears that money-printing and the market’s flight to “safe haven” assets are inflating a catastrophic bond bubble.

More than three quarters of 520 professional investment advisers quizzed by the CFA Society UK, their industry body, now say that government debt is overvalued, according to research released today.

And the data shows that this view is hardening: 78 per cent of investment advisers call the bonds “overvalued” in the second quarter of 2012, versus 72 per cent in the first quarter. Forty-three per cent of those queried called government bonds “very overvalued”.

They also call corporate bonds (49 per cent) and gold (61 per cent) overvalued.

CFA UK chief executive Will Goodhart said: “While fixed income securities have been attractive on account of their perceived ‘safe haven’ status, our survey suggests that they may no longer offer good value.”

Some economists have been warning for months that the cumulative effect of money-printing and mis-pricing of risk is leading to a bubble in public debt.

Philip Booth of the Institute of Economic Affairs said: “You’d expect quantitative easing to lead to a bubble in bond values – that’s one of its purposes.” But he said that while quantitative easing is a short-term factor propping up gilt prices, there is also a long-term problem.

“I don’t think people have quite gotten to grips with the fiscal situation the UK is in,” he said. “It’s pretty grim… [Investors] are underestimating the long-term risks in the UK, US and EU government bond markets.”

At a recent bond auction, the UK was able to borrow at negative yields – paying interest at rates lower than inflation, with investors effectively paying the government to borrow from them.

That has prompted the chancellor to consult on issuing 100-year bonds, but his plan could be dealt a blow if demand for government debt softens. The CFA Survey is the second sign of weakening demand after a sharp sell-off in US Treasuries last week.

Andrew Lilico, director of Europe Economics, said: “The market has tended to be far too relaxed about the inflation risk. Most of the risk lies in a crash in [nominal bond] prices rather than a rise.”