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Breaking from Moneynews.com Individual Investors Dumb Like a Fox on Bonds The conventional wisdom is that individual investors are being taken for a ride by a bubble in the bond market, switching to fixed income from equities at just the wrong time. Not so fast, says Wall Street Journal columnist Jason Zweig. “If anybody is to blame for a bond bubble, it isn't Joe Schmo; it's Uncle Sam, with some help from overseas,” he writes. The Federal Reserve holds $2.04 trillion in government bonds, buying triple the amount that retail investors added to their bond holdings since the end of 2008. As for foreigners, they have purchased $373 billion of Treasuries so far this year, more than 1.5 times what individual investors have put in all bond funds. "The Fed has effectively been taxing money-market funds (by cutting short-term interest rates) to recapitalize the financial system and to make things easier on borrowers," Dan Dektar, chief investment officer at Smith Breeden Associates, told the Journal. And individual investors are reacting rationally, shifting money from their money-market funds, which yield almost zero, to low-risk short-term bond funds. “The rush into bond funds, as big as it has been, still leaves many households with surprisingly little exposure to the risk of losses if interest rates rise,” Zweig writes. And the bond party may go on for a while. “It’s likely a bubble, but bubbles can last for a long time,” Tim Ghriskey, chief investment officer at Solaris Asset Management, tells Moneynews.com. © Moneynews. All rights reserved.