‘I can feel it coming.... a whole new round of disastrous speculation, with all the familiar stages in order - a blue-chip boom, then a fad for secondary issues, then an OTC play, then another garbage market in new issues and finally the inevitable crash. I don't know when it will come but I can feel it coming and, damn it, I don't know what to do about it.’

Those are the words of Bernard J. Lasker, a former president of the New York Stock Exchange and they date back to 1970. They referred to a run up in US stocks in 1968-70 that had encouraged a slew of companies to come to market and persuade investors to part with their cash. The Dow Jones suffered a nasty wobble in mid-1970 and Lasker was ultimately vindicated in his caution by the frightening bear market of 1973-74 (see chart).

It may now be time to heed his words of wisdom again, but with regard to the bond market. I am not saying it is game over for fixed-income as an asset class, not least as we are great supporters of the London Stock Exchange Group's (LSE) Order book for Retail Bonds (ORB) platform, as evidenced in this week's Feature (see page 28). But when Bolivia and Mongolia are able to start selling paper to yield-hungry punters, and do so with coupons that are not a whole lot higher than those offered by Western blue-chip corporations or governments, it really is time to wonder whether an accident is overdue.

For bonds to really tank, an inflationary spike is needed and despite central banks' best efforts with quantitative easing (QE), this does not look immediately likely, even if it remains the key risk on a three-to-five year view. But those investors looking for 'safe' income need to be more careful from now on and not take bonds for granted.

Oil slick

Shares last quoted Lasker four summers ago (see Opinion, Shares 21 Jul '08), on that occasion in the context of the oil exploration sector, where a rash of firms had dashed to market as the oil priced soared to a peak of $147 a barrel. We did well to pay attention. Of the nine explorers who had floated in the previous four months, seven fell by at least 40% and the Aim Oil & Gas index collapsed shortly after, never to recover the highs seen back then.

At least Indus Gas (INDI:AIM) helped rescue something from the wreckage. The firm's stunning ascent means the nine stocks in aggregate have eked out a four-year, 3% profit, but the stress involved hardly suggests it was worth the ride (see table below).

Risk profile

Rampant speculation now seems to be creeping into the previously staid world of fixed income investment, at least if my reading of the Financial Times newspaper is even half accurate. In October, Bolivia issued its first overseas bond for over 80 years as it sold $500 million worth of ten-year paper with a 4.9% coupon. In November Mongolia knocked out a $500 million tranche of five-year bonds and $1 billion of ten-year at 4.125% and 5.125% respectively.

I accept these yields look interesting in a world where base interest rates are effectively zero and note retail investors could not access these deals, other than through specialist, professionally run collectives. But the coupons look pretty skinny compared to A- rated London Stock Exchange Group 4.75% 2021 (LSE1) bonds which now reside in my wife's Individual Savings Account after October's issue.

Bolivia may be BB- with ratings agency Standard & Poor's but the country is run by Evo Morales, a man who sides with Fidel Castro and Hugo Chavez when it comes to matters political and has a track record of nationalising local assets. A history of debt defaults and moratoria also suggests the country was unable to offer bonds overseas for nearly 90 years for a reason. Butch Cassidy and the Sundance Kid, reportedly killed in Bolivia in 1908, may not be the last to regret a trip to Sucre. Meanwhile, the FT tells me Mongolia has had to be rescued five times from its creditors since 1990, which suggests caution is needed, even if the country is resource rich.

Buyer beware

The 30-year run in bonds may have further to run, not least as central banks keep buying fixed-income assets as part of their QE programmes. Any growth scare in 2013 should also favour the asset class, while Japan's experiences since 1989 suggest bonds will be the place to be if deflation takes a grip. But greater care is now required and buyers on the ORB should focus on quality credit. Look at the cashflows, debt repayment schedules and even the share price as indicators of whether the bonds are worth a look. The disparity on the last point between recent ORB issuers, the LSE, Unite (UTG) and Stobart (STOB) is intriguing.