The Intelligent Investor: Are Bond Rates on a Road to Nowhere?
The "bond vigilantes" who once imposed law and order on financial markets are being run out of town. That means investors thirsting for a quick return to "normal" interest rates might stay parched for a long time to come.</br></br>Throughout most of the bull market in bonds over the past 30 years, big investors dumped Treasury securities whenever the U.S. flirted with fiscal recklessness. By sending a stinging signal to Washington that they wouldn't tolerate irresponsible policies, the vigilantes imposed discipline and kept rates stable at yields investors could live on.</br></br>But the bond vigilantes are on the run, warns Todd Petzel, chief investment officer at Offit Capital, a New York firm that manages $6 billion for wealthy clients. In recent years, Mr. Petzel says, the Treasury market has changed in profound ways.</br></br>Historically, the bulk of U.S. Treasury debt was held by private investors -- including the big institutions that used their enormous market power, vigilante-style, to keep interest rates in line.</br></br>Now, Mr. Petzel points out, much of the demand for U.S. debt comes from "uneconomic" buyers who scoop it up -- and hold on to it -- at any price. Only 23% of Treasurys are held by individual and institutional investors -- down from 55% in 1982 and 31% a decade ago.