Bond prices are going crazy... Buffett doesn't like bonds... Paulson back in black

"That doesn't make any sense..."I called Porter earlier today to discuss the massive bubble forming in the bond market. We've been warning our readers about this event for years, but it's now coming to a head.

I checked a few blue-chip issuers on Bloomberg, and bond prices are officially losing touch with reality. Investors are paying a premium to hold corporate bonds with paltry yields. Microsoft paper yielding 4.5% and maturing in 2039 trades for more than $110. ExxonMobil paper yielding 3.6% due in 2021 trades for more than $144. Johnson & Johnson paper yielding 4.35% and due in 2029 trades for $133.

As Leon Cooperman said yesterday... When investors are scrambling to lock in low yields for long periods of time, you don't want to be buying bonds. Would you loan money to anyone right now for 20 years at 4%? And would you pay a premium for the opportunity? Remember, your principal is returned at par (or $100). You eat the rest.

Today's trading is just bizarre in general... Treasury's are up, the market is flat, and gold and oil are up. Nothing makes sense. You would at least expect bonds to fall after Warren Buffett's announcement yesterday, putting him firmly in the "bond bubble" camp... At Fortune's Most Powerful Women Summit, Buffett said it's "quite clear stocks are cheaper than bonds." He added he "can't imagine" why anyone would buy bonds at current prices.

While other investors have been piling into bonds, John Paulson has loaded up on stocks. After two correct bets that made him billions (shorting housing followed by long financials), Paulson's hedge fund had a bad 2010, down around 10%. The recent stock rally has pushed his largest fund back into the black... Paulson's flagship Advantage Plus fund jumped 12% in September. He's received a lot of flak for buying gold and stocks, but we think he's playing this market right.