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By Nadia Papagiannis, CFA | 09-15-2010 05:14 PM

Merk: Bond Market Too Good to Be True?

Low volatility among bonds could be an indicator of a bubble, says Merk Investments' Axel Merk.

Nadia Papagiannis: Hello. My name is Nadia Papagiannis. I am an alternative investment strategist here at Morningstar.

Today I have with me Axel Merk, the portfolio manager of the Merk Hard Currency, Merk Asian Currency, and Absolute Return Currency Funds.

Thank you for being here with us today, Axel.

Axel Merk: Good to be with you.

Papagiannis: Axel, many investors are at a loss today as to how to protect and grow their capital, especially in the face of the equity markets, pretty much the collapse between October 2007 and March 2009, and then we're still seeing a lot of volatility in the equity markets, especially in April, May and June of this year. And so, as a result, they have piled into fixed income. Now, is this a good idea?

Merk: Well, people like to chase trends, and it does for a good cocktail talk, but it may not be very profitable in the medium term. The big challenge in the bond market is that even during normal times, the volatility in the bond market is far greater than we've seen recently. And so, you can have unusual events, especially you have the interest risk in the bond market. If interest rates were to go up, if U.S. Treasures were to plunge because of unexpected growth or because of foreigners selling the U. S. dollar, you can have very significant surprises in the bond market, and in any bubble scenario people are discounting those sort of risks.

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