Friday, January 22, 2010

Bonds Are Too Hot

By Matthew Craft -

The flow of money into bond funds has had many welcome knock-on effects. As bond prices rise and yields fall, borrowing costs have dropped, helping companies tap the flood of cash to pay off other more expensive debts. But market watchers at Citigroup are beginning to worry about bonds' newfound popularity.

In a note to clients this week, Citigroup strategists compared the current trend to the craze for technology stocks more than a decade ago. "Such conditions were evident for aggressive growth equity mutual funds during the late 1990s at the apex of the Internet bubble and a similar trend appears to be forming now," wrote Tobias Levkovich and Lorraine Schmitt. They liken the paltry yield on Treasury bills - 6-month bills currently pay 0.13% -- to the high valuations given technology stocks in late 1999.

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