Bonds Safe As Cash?

I have written a few posts about the bond market bubble, with the most recent being the post of October 4 titled "Thoughts On The Bond Bubble."

There are many aspects of the bond market that support the conclusion that it is in an enormous bubble.  I ran across the following from the SentimenTrader.com daily commentary of October 7 that I find notable.  It is further evidence that risks in the bond market are being ignored or not properly heeded.  Here is the commentary:
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Individual Investor Bond Allocation

The latest asset allocation survey from the American Association of Individual Investors (AAII) was just released, and it shows a continuation of an odd development.

Investors' allocation to stocks was unchanged at 55%, but they increased their allocation once again to bonds, while sacrificing their cash cushion.

Their bond allocation jumped 4% to 25% of their total portfolio, while cash dropped 4% to 20%.

The odd thing about it is that historically, there has been a very positive correlation between investors' allocations to bonds and cash.  Basically, it's a "fear trade" - when they're concerned, they pull money out of stocks and put it into bonds and cash.  When they're confident, they pull money out of bonds and cash and put it into stocks.

But not lately.  Over the past year and a half, the correlation has completely broken down, and investors are now using the bond market as their safe haven.  When they reduce stock exposure, they put it into bonds, and not cash.



Yes, the interest rate on cash is nearly nil.  But it was also extremely low during periods prior to 2010, and yet the AAII folks still didn't consider bonds to be the only safe haven.

The thing that's a little disturbing is that by using the bond market as a default safe haven, investors neglect to remember that long-term bonds do carry the risk of losing one's capital unless held to maturity, which can be a very long ways off.

Looking at the other sentiment indicators on the Bond page of the site, we can see a smattering of other extremes, like sentiment surveys and the positioning of traders in bond futures.  Put/call ratios are exceptionally low, but they have been an inconsistent predicator of future market performance.  Rydex traders have seemingly given up trying to time that market.

The chart above is very long-term, and it may be nothing to be concerned about.  It just struck me as unusual - and not positive for bonds - that it now seems to be considered as safe as cash."

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SPX at 1159.99 as this post is written