Yesterday Bloomberg gathered some of the world’s most successful investors to talk, and argue, about the state of the economy at the Most Influential Summit in New York. But one thing that most seemed to agree on was that the bond market has gotten out of control.
“Bonds are at ridiculous levels,” said Tiger Management founder Julian Robertson at the Bloomberg summit. “It’s a worldwide phenomenon that governments are buying bonds to keep their countries moving along economically.”
Julian Robertson not the only one concerned about debt markets
Robertson’s track record, along with those of the Tiger cubs who he mentored, should give his warning that the current bond bubble is going to end badly some weight. But he wasn’t the only one concerned about debt markets. Omega Advisors founder Leon Cooperman, who thinks the stock market is fully valued but not overheating, called bonds “very overvalued” and Oaktree Capital Group chairman Howard Marks warned investors to “clip the top of the cycle” so that they don’t get caught in the next correction.
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Of course we’re all familiar with the basic arguments why bond might be overvalued: after years of extreme monetary accommodation yields are incredibly low, pushing investors further and further out on the risk curve. Rates that you might have gotten on US government debt in decades past are now being given to high yield debt, even though historical default rates make the investments difficult to justify. Robertson says that this effect also pushes savers who would normally be happy investing in bonds into the stock market, adding to equities full valuations.
Every company we own has been refinanced, says Conway
Bill Conway, co-founder and co-CEO of The Carlyle Group LP (NASDAQ:CG), broadly agreed with Robertson’s assessment of the bond market, but said that he didn’t see what catalyst might cause the bubble to pop. Tapering, ISIS, and deceleration in China could all potentially cause the bond market to fall apart Conway just doesn’t see any of the obvious financial or geopolitical tensions as the likely culprit. In the meantime, he’s putting low rates to use as best he can.
“Everyone company that we own has refinanced itself at least once to have virtually no covenants. Covenant lite is a euphemism for ‘we will pay interest and principal when due,’ there are no real covenants other than that,” said Conway. “The term’s been extended and the interest rate has been reduced on so many of the credits.”