A small rise in inflation may trigger a correction for the bond market, as too many investors have piled in, Roman Scott, managing director at Calamander Capital, told CNBC Monday.
His remarks echo fears by Federal Deposit Insurance Corporation Chairwoman Sheila Bair that a bubble is in the making in bond markets as a combination of low interest rates and high liquidity means investors are looking for assets perceived as safe.
"For me the bond market is at extreme danger level. It's the one thing that keeps me up at night," Scott said.
"Investors continue to buy these and it only makes sense if you are holding these to maturity," he said.
But not many of the investors who buy bonds actually hold them to maturity and their prices, which move in inverse correlation to yields, may fall if a rise in inflation brings about higher interest rates, he said.
Investors in the bond market probably rely on the fact that the Federal Reserve will come in and buy lots of bondswhen they do their second round of quantitative easing, Julian Callow, chief European economist at Barclays Capital, told CNBC.
"The bond market is entirely being driven by expectations of the Fed as always," Callow said.