Wall Street’s Worst-Case Scenario: A Run on Bonds – Bloomberg 07-03-14

Salient to Investors:

If too many people decide to get out of bond funds at the same time, the wave of selling could swamp the market, forcing fund managers to unload their bonds at rock-bottom prices in a downward spiral.

Ira Jersey at Credit Suisse says taxable bond funds have 9.5 percent of their portfolios in liquid assets such as cash and US Treasuries, more than most would assume.

Brian Reid at the Investment Company Institute says interest rate shocks are nothing new, and markets are not nearly as fragile as people worry about – massive outflows from bond funds has a low probability and did not occur even during the financial crisis.

Eric Jacobson at Morningstar says the danger is overstated, as the next crisis is unlikely to be the one that everyone worries about today. Jacobson says by the time we got to anything that resembles a scary outcome, much of the fearful money will have already moved. Jacobson says Wall Street dealers don’t fulfill the same sort of function they did 10 years ago, with much of the market capacity now shifted to mutual fund owners, who are more likely to join the crowd than go against it.

Read the full article at http://www.businessweek.com/articles/2014-07-03/bond-run-is-wall-streets-worst-case-scenario#r=rss

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