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I recently read this in an article about the current state of the bond market:

Coming off a 40-year bull market in bonds, the potential for capital losses on bond investments is very real, and that type of risk is one that many conservative investors won't necessarily appreciate.

What does it mean for bonds to have a 40 year bull market? My understanding of bonds is that their fundamental upside is typically well understood since they become a fixed amount of cash at a fixed date excluding some form of non-payment. There's no reason to "overpay" based on future growth expectations as there would be with stocks.

I'm having a hard time understanding how an instrument like bonds could be overbought over a period on the order of 40 years, since this is longer than a typical bond term. I understand how bond prices will vary with interest rate, but I don't see how they could be significantly overvalued over the long term.

The concept of a "bond bubble" seems to be coming up regularly, so I must not be understanding something. What does this mean?

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Firstly, "bull market" does not necessarily mean "overbought" or "overvalued". Bonds prices are highly dependent on federal interest rates (as fed rates rise, bond prices fall), and 10-year treasury rates have declined on average for the last 30+ years.

So a "bull market" in bonds has more to do with underlying interest rates falling over that period than any supply/demand effects. Since interest rates are still at historic lows (though rising somewhat), bond prices are still "high" compared to equivalent bonds in the past, but whether there is a "bubble" that is getting ready to burst is not certain. If interest rates do rise, bond prices can be expected to decline, but I would not expect declines significantly larger than the rise of interest rates themselves (i.e. not a "burst" unless something causes interest rates to rise suddenly as well).

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It's a misstatement to claim that there has been a 40 year bull market in bonds. To aver that, you'd have to ignore all of the 1% to3% treasury yield corrections as noise and only compare the rate peak in 1981 to recent lows.

Google "The Great Bond Massacre of 1994". That will turn up the Fortune article detailing the $1.5 trillion dollars in worldwide bond losses that year. Bond holders felt anything but bullish then.

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