Why You Should Be Worried

I sometimes wonder if the world has gone mad.

While many investors are fretting over whether stock markets are bubbling over with excessive exuberance, there is something quite worrying going over in the bond market that barely raises an eyebrow.

German 2-year bonds, for instance, are yielding minus 0.28%. Meanwhile, the country’s 5-year bonds are yielding minus 0.13%. Elsewhere, Switzerland’s 10-year bonds are yielding minus 0.13%. Those are negative yields, by the way.

Don’t care, won’t care

Can you imagine investing in something that you know will lose money in two, five or ten years’ time?

I can’t. But it seems that many investors are prepared to throw money at just about anything, even if it means getting back less than what they paid for an asset in a few years’ time.

That is unless someone is willing to pay you more for the asset before it matures.

If that isn’t a sign of a speculative bubble, then I don’t know what is.

And yet nobody seems to care, wants to care or, worst still, even knows how to care about it, anymore.

The irrational investing behaviour is due to the vast amounts of Quantitative Easing money that has flowed straight from central banks’ printing presses into global markets.

Who’s doing it?

America has done it. The UK has done it. Japan is doing it. And now the Eurozone has been forced to print money too.

There is currently so much money swirling around global economies that some investors don’t know what to do with the cash, anymore.

The creation of cheap money has not necessarily been a bad thing, though.

If it had been not for America’s ingenious magicking of cheap money in 2008, then I doubt if anyone can even begin to imagine what the global economy could look like today.

But as many of us know, there can be unintended consequences for even the best intended of actions.

The unintended consequence, in this instance, has been a bond bubble.

Big problem

The situation might not be too worrying, if the bond market is only a tiny part of the world’s financial markets. But it is not. The global bond market, which in 2012 stood at US$100 trillion, was nearly twice the size of the global equities market.

A bursting of the bond market bubble could have far-reaching consequences, simply because of its sheer size. Exactly how or what could trigger a bursting of the bubble is unclear, though. But for now, investors seem happy to keep dancing whilst the printing presses are humming.

The impact of a bond-bubble eruption on the stock market is unclear. But long-term share investors should not be overly concerned.

The operative word here being investors, rather than speculators. An investor is someone who lays out money today to receive more money tomorrow.

Steady growth

For instance, if you invest in a business that currently yields 6%, and it can comfortably grow its dividend at a compound rate of 5% a year, then the yield on the original cost of your investment should be 12% in around 14 years’ time.

Chances are the share could appreciate in price over that period too.

But do dividend-growing shares like that really exist?

Yes they do.

SIA Engineering (SGX: S59) has grown its payout from S$0.05 in 2004 to S$0.20 in 2014. SingTel (SGX: Z74) investors have seen their dividends grow from S$0.06 in 2004 to S$0.17 last year, whilst Sembcorp Industries (SGX: U96) has lifted its payout at a compound annual rate of 12% over ten years.

That strikes me as being a better investment than buying a ten-year bond that will return less after holding it for an entire decade.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock - Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.