Church House's Jeremy Wharton explains why the real risk for investors is not a 'bursting of the bond bubble', but a change in sentiment towards corporate bonds.
Let me, rather un-cheerily, take you back to 1994. From the start of the year, and then progressively throughout the year, the Federal Reserve raised short-term rates from 3% to 4.25% in response to mounting inflationary pressure. This was magnified in longer-term bonds (particularly treasuries) where investors had been seeking higher yields and, subsequently, long-term rates leapt. The timing and pace of this tightening caught many bond investors (whose only real option should have been to shorten maturity) by surprise and the famous 'bond massacre' gained momentum, wiping about $1t...
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