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Bond ‘Bubble’ Inflating Faster Than Dotcom

Analysis from one Wall Street strategist shows that the pace of money flowing into bonds is faster at this stage than the infamous dotcom bubble of the late 1990s. And that’s not necessarily bad news for those Treasury investors.

Almost two years into the bond flight, about $550 billion has poured into U.S. bond mutual funds and exchange-traded funds, according to BNYConvergEx Group Chief Market Strategist Nicholas Colas. Using inflation-adjusted figures, investors had put $499 billion at this same stage of the Internet bubble. Colas selected December 1996, the month of Alan Greenspan’s “irrational exuberance” speech, as the estimated start of the bubble in equities. For bonds, he uses the collapse of Bear Stearns in March 2008.

“We all know bubbles can last longer than anyone thinks possible, and the money flows give us a sense just how much more cash may be waiting in the wings,” said Colas, in a note to clients today. “In total, U.S. equity stock funds logged some $840 billion in new capital from Greenie’s warning to the peak of the NASDAQ, and over $1 trillion before money actually stopped flowing into stocks. So that $550 billion in new bond fund money may have some more company soon, if the 1990s period is any guide.”

Government bonds will have their best month in three years this August as prices surged and yields fell. The 2-year Treasury yield hit a record low this month of below a half percent and the 10-year yield touched a 19-month low, illustrating just how much aversion to riskier asset classes there is right now.

“Out of everything that could be a bubble, bonds could be the one that lasts the longest,” said Guy Adami, managing director for Drakon Capital and a ‘Fast Money’ trader. “Japan had a bond bubble for 20 years.”

Treasurys got a boost this month after the Federal Reserve began using money from its maturing mortgage portfolio to purchase Treasuries, a move which further spooked the equity markets about just how bad the economy must be. The central bank has not restarted a formal second quantitative easing program of Treasury purchases using new money, however.

The rate strategy team from RBS called for a correction in the bond bull market yesterday, citing how overcrowded the trade has become and Fed Chief Bernanke’s failure on Friday to explicitly say from his Jackson Hole, Wyoming retreat that round two of quantitative easing is definitely in the cards.

Treasurys have been “overbought for weeks and in dire need of a ‘long squeeze’,” said Bill O’Donnell in a note to RBS clients.

Corrections are indeed a hallmark of any bull or bubble. The bigger question is, will investors see the same magnitude of wealth destroyed as they did from buying and holding tech stocks into 2000?

Not if they hold these bonds to maturity and the U.S. can still pay its bills they won’t. “Bond investors in the current environment can at least retort that they will, eventually, get all their money back,” said BNY’s Colas.

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

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Trader disclosure: On August 31st, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour owns (AAPL), (BAC), (EEM), (INTC), (POT); Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST); Terranova Owns (AXP), (GS), (IBM), (QCOM), (AAPL), (GOOG), (BRCM), (TER), (MSFT), (C), (MRVL), (BMO), (V), (POT), (OXY), (GLD), (SU), (FCX), (APA), (XBI)

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