Tag Archives: bond bubble

Thoughts On The Bond Bubble

Lately there has been much commentary on whether the bond market is in a bubble.  While many believe such a bubble exists, others – including many prominent investors and commentators – disagree.

As I have previously written, I believe that there is a bond bubble encompassing the entire bond market.  While for many reasons one might not expect the bond market to become a bubble, nonetheless such a bubble has occurred and it is now simply enormous.  This bond market bubble stands out from other bubbles in history in both size and duration.

As one can see in the chart below, from Doug Short’s site on 10-4-10, the 10-Year Treasury Yield (blue line) has been on decline since the early ’80s:

click on chart to enlarge image

This decline in bond yields has been exceedingly munificent to the economy in many different ways.  As well, the bond bubble has been very beneficial to a range of asset classes.   On the above chart, one can see the performance of the S&P500 in green during this period of falling interest rates.

Of course, if one believes the bond market is a bubble, then a pivotal question becomes when will the bubble “pop?”  This question is difficult to answer, as there is a complex interaction between various factors fueling this bubble.

One important factor is that of additional Quantitative Easing (QE).  Many believe that such efforts will further depress interest rates.  Various estimates seem to generally support the idea that $2 Trillion of additional QE would depress 10-Year Treasury rates (currently at 2.48%) by approximately 100 basis points.  While I believe that such an effect may be possible, it is likely such an impact is overstated.

For many reasons, it is tempting to conclude that the bond bubble will last for years.  In fact, I am not aware of anyone who is predicting its imminent demise, i.e. “popping.”  However, I believe, from an “all things considered” basis, that the “popping” of the bond market will happen in the short-term (i.e. likely within 6 months, and possibly even yet in 2010).  I make this judgment based upon many different factors.  Such a bursting of the bond bubble will have immense ramifications on many levels; I have already discussed the threat of rising interest rates in an April 6 post.

Another critical issue with regard to the bond bubble is the following:  If one believes that there is a bond bubble that is serving to unduly depress interest rates, what might be the “natural” interest rate – i.e. one that may endure after the bond bubble pops?  I may discuss this, as well as further define the timing of the bond market “top”, in future posts…

A Special Note concerning our economic situation is found here

SPX at 1137.03 as this post is written

The Corporate Bond Bubble

On August 13 The Wall Street Journal had an article titled “J&J Sets a Yield Low.”

From the story: “The health-care products firm sold 10-year bonds with an interest rate of 2.95%, or a risk premium of 0.43 percentage point over comparable Treasurys.”

The story provides an overview of the strong market environment for both corporate and junk bonds.

My view is that the entire corporate bond market is in a bubble.  This bubble is related to the bubble in U.S. Treasuries which I have previously commented upon.

A Special Note concerning our economic situation is found here

SPX at 1092.54 as this post is written

The Bond Bubble

On June 8 The Wall Street Journal had an article titled “Bond-Fund Managers See Signs of a Bubble.”

While most people wouldn’t think of the bond market as having bubble characteristics, nonetheless such a bubble has developed.

The article mentions several vulnerabilities the bond bubble faces.  I would add that a major vulnerability is a repricing of risk due to perceived asset quality, due to a variety of issues.

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SPX at 1086.84 as this post is written


from the November 3 FOMC Minutes:

“Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.”


from the book Meltdown, p8, by Thomas E. Woods, Jr.:

“The Fed’s policy of intervening in the economy to push interest rates lower than the market would have set them was the single greatest contributor to the crisis that continues to unfold before us.  Making cheap credit available for the asking does encourage excessive leverage, speculation, and indebtedness.” 


As one can see from the above two quotes, there is a considerable difference in philosophies regarding the probability of prolonged low interest rates in creating asset bubbles.  The top quote is from the November 3 Federal Open Market Committee Minutes, while the quote below it from Tom Woods Jr. and seems to offer a concise view of the Austrian philosophy on the low interest rate matter.

The issue of whether the ultra-low interest rate environment that has been put in place has fomented asset bubbles is a critical one.  For background on this matter, the November 30 BusinessWeek had a story titled “Is the Fed Creating New Bubbles?” and can be found at this link:


My opinion on the matter is that there are currently multiple bubbles that have formed across various asset classes.  They are of various sizes and “vintages.”  Asset bubbles that burst can of course cause tremendous economic damage.  Perhaps the best example of this is “bursting” of the housing bubble.

Some bubbles are harder to spot than others.  Bubbles, almost by definition, include irrational behavior, and therefore can be hard to predict both in their formation as well as their ultimate size.  There are many factors that can come into play in order to cause bubbles.

I have addressed my thoughts as to whether Gold is in a bubble in a November 20 post.   Another question, that is critical  to both investors and the economy, is whether U.S. Treasury securities, especially the 10 Year, is in a bubble.   I believe the answer to this is “yes.”  The reasoning for my opinion is rather lengthy and complex; however, the previous post (from November 30) represents some of my thought on the issue.


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SPX at 1112.28 as this post is written