Tag Archives: bubbles

The Bond Bubble – July 2016 Update

In previous posts I have discussed the Bond Bubble and its many facets, as my analyses indicates that the overall bond market is an exceedingly large asset bubble with immensely large and wide-ranging economic implications.

Since my last post on the Bond Bubble (the June 24, 2014 post titled “The Bond Bubble – June 2014 Update“) I have written various posts about interest rates and associated dynamics.

It should be noted that current rates on 10-Year Treasury Yields, from a (ultra) long-term historical view, remain extremely depressed.  Of note, recent yields have reached all-time lows, as mentioned in the July 6, 2016 post titled “10-Year Treasury Yields – Two Long-Term Charts As Of July 6, 2016.”

This can be seen in the following chart of 10-Year Treasury Constant Maturity Yields:

10-Year Treasury Constant Maturity

Data Source: FRED, Board Of Governors Of The Federal Reserve System; accessed July 27, 2016:

https://research.stlouisfed.org/fred2/series/DGS10

Here is another chart of the 10-Year Treasury Yield, from 1980 on a LOG scale, with a long-term trendline.  The current yield is 1.563%:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

10-Year Treasury Yields

As seen in practically all economic forecasts, the belief that the ultra-low interest rate environment will continue to be sustained is widespread.

There are various highly notable aspects of the Bond Bubble that lack general awareness.  While a comprehensive discussion can’t be done in a brief manner, many of my previous posts have discussed certain aspects.

Of particular concern is the financial and economic impact resulting from the “bursting” of the Bond Bubble.  As I mentioned in my post of February 6, 2013 (“The Bond Bubble – February 2013 Update“) my expectation at that time – and what I continue to believe – is that after the bursting of the Bond Bubble the rate on the 10-Year Treasury will be far higher than it has been in recent years.  As stated in that post:

While I have not spent considerable effort trying to ascertain the level of this “natural” interest rate, I have little doubt that such a “natural” rate on the 10-Year Treasury would be at least 5%-10% and most likely considerably higher (possibly multiples thereof).  Of course, such rates would have massive implications on a number of fronts.

The prospects of such a large increase in interest rates – which, due to many dynamics of the bursting of this particular bubble – will likely happen in a short period of time.  Overall, this situation is of tremendous concern on many levels, including the impact such rising interest rates will have on other immensely large asset bubbles, including the stock market.

As I stated in the aforementioned February 6, 2013 post;

The perils of this bond bubble and its future “bursting” can hardly be overstated.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2169.18 as this post is written

The Bond Bubble – June 2014 Update

In previous posts I have discussed the Bond Bubble and its many facets, as my analyses indicates that the overall bond market is an exceedingly large asset bubble with immensely large and wide-ranging economic implications.

Since my last post on the Bond Bubble (the February 6, 2013 post titled “The Bond Bubble – February 2013 Update“) I have written various posts about interest rates and associated dynamics.

It should be noted that current rates on 10-Year Treasury Yields, from a long-term historical view, remain extremely depressed.  This can be seen in the following chart of 10-Year Treasury Yields:

10-Year Constant Maturity Treasury Yield

Data Source: FRED, Board Of Governors Of The Federal Reserve System; accessed June 23, 2014:

https://research.stlouisfed.org/fred2/series/DGS10

Here is another chart of the 10-Year Treasury Yield, from 1980 on a LOG scale, with a long-term trendline, and currently yielding 2.623%:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

10-Year Treasury Yield

Perhaps one of the more striking aspects of the bond environment is that although 10-Year Treasury Yields are up significantly from their lows, various interest rates on less creditworthy securities are at or near their lows.  This can be seen in various securities and bond segments, both domestically and internationally, including the BofA Merrill Lynch US High Yield Master II Index chart, which shows a current yield (as of June 20, 2014) of 5.18% and its OAS Spread at 3.36%.

Of course, the question remains as to which direction interest rates, especially on the 10-Year Treasury, will take from here.

While there have been many arguments – including economic weakness – put forth that would indicate 10-Year Treasury Yields will fall from here, there are also many other (including those lesser-recognized) factors that indicate that the next sustained move on 10-Year Treasury Yields will continue upward.  While the “up vs. down” argument is complex, my analyses indicate that the trend in the 10-Year Treasury Yield will continue upward.

As I have explained in previous posts on interest rates and the Bond Bubble, such as the August 22, 2013 post “The Impact Of Rising Interest Rates,” what is particularly intimidating is the prospects for the economy and financial markets when the bond bubble finally “bursts.”  While the duration of this bond bubble makes (ultra) low interest rates seem sustainable – and by extension, “natural” – my analyses indicate that this interest rate environment is nothing of the sort.

Furthermore, relative to past rising interest rate environments, due to various current dynamics the coming increase in interest rates will be far more pernicious to the overall economy.

As I stated in the aforementioned February 6, 2013 post;

The perils of this bond bubble and its future “bursting” can hardly be overstated.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1962.61 as this post is written

Additional Thoughts Concerning Rising Interest Rates

On August 22, 2013 I wrote a post titled “The Impact Of Rising Interest Rates,” in which I discussed various wide-ranging impacts of the rising interest rate environment that I believe lack recognition.  In this post, I would like to make additional comments regarding the future level of interest rates, and specifically the 10-Year Treasury Note yield.

First, for reference, here is a long-term chart of the 10-Year Treasury yield from 1965, as seen in Doug Short’s post of November 29 titled “Treasury Yields In Perspective” :

Dshort 11-29-13 - 10-year-yields-since-1965-log-scale

Second, for reference, is a daily 5-year chart of the 10-Year Treasury Note yield on a LOG scale, through December 9, with a current value of 2.857%.  As one can see, recent resistance has been near the 3.0%-level:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 12-10-13 TNX Daily LOG 5 Year

The November Wall Street Journal Economic Forecast Survey shows an average expectation of 10-year Treasury Note yields of 3.43% in December 2014 and 3.89% in December 2015. As well, many observers of interest rates have stated, due to either technical and/or fundamental reasons, that the 10-Year Treasury Note yield should peak at 3.5%-4.0%.  While their reasoning and analyses for such a conclusion seems reasonable – if not compelling – my analyses indicate that interest rates will climb to far higher levels, with the outsized adverse consequences I discussed in the aforementioned August 22 blog post.  Much of the potential for rising interest rates will be due to the “bursting” of the bond bubble.

Many observers have dismissed the threat of rising interest rates, often for the reason that they believe a rising interest rate environment will be accompanied by a stronger economy; thus, by their reasoning, although there will be some sort of economic “drag” caused by rising interest rates, the “drag” will be largely, if not completely, offset by the concomitant strengthening economy.

For a variety of reasons, I do not believe this line of reasoning to be accurate.  As I stated in the aforementioned August 22, 2013 post:

Although there are various areas which benefit from increased interest rates, from an “all-things-considered” basis rising interest rates have many problematic aspects for our current-era economy. While 10-Year Treasury Yields were above 5% as recently as 2007 – with no seeming adverse economic impact – I believe that the economy will have difficulties “absorbing” higher yields far before that 5%+ rate on the 10-Year Treasury is again reached.

Also, I do not believe that one should discount the adversity such a rising interest rate environment will have on the financial system, as well as (exceedingly) problematical aspects such a rising rate environment will have on various U.S. debt-funding and QE-related operations, such as that discussed in the June 26 post, “Potential Losses In The Federal Reserve’s Portfolio.”

As well, my analyses continue to indicate that another financial-system “crash” of tremendous magnitude will occur.  In this “crash” I expect that 10-Year Treasuries will not be the “safe haven” many believe them to be.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1808.37 as this post is written

The Impact Of Rising Interest Rates

With the recent increase in interest rates, perhaps the paramount question is what impact a rising interest rate environment will have on the economy.

First, for reference, here is a long-term chart of interest rates from 1962, as seen in Doug Short’s post of August 17 titled “Treasury Yields In Perspective” :

(click on chart to enlarge image)

Dshort 8-17-13 - treasuries-FFR-since-1962

As one can see, the overall trend in interest rates has been declining, dating back to the peak seen in the early-80s.

The impacts that these falling interest rates have had is extensive, and many of the impacts lack (full) recognition.  As I have previously commented, most recently in my February 6, 2013 post, “Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.”

While the list of ways in which lower interest rates have acted as a benevolent factor to the economy is exceedingly lengthy, one such notable area is the impact lower interest rates have had on corporate earnings.  I highlighted two estimates concerning the positive impact of declining interest rates on corporate profitability in my July 29 ProfitabilityIssues.com post titled “Impact Of Low Interest Rates On Corporate Profitability.”

Although there are various areas which benefit from increased interest rates, from an “all-things-considered” basis rising interest rates have many problematic aspects for our current-era economy.  While 10-Year Treasury Yields were above 5% as recently as 2007 – with no seeming adverse economic impact – I believe that the economy will have difficulties “absorbing” higher yields far before that 5%+ rate on the 10-Year Treasury is again reached.

The impact of the recent rising interest rate environment is particularly noteworthy, not only because of the historically-rapid speed of its ascent, but also because, as I have commented before, my analyses indicate that interest rates can rise to levels much higher than generally expected.  I have written extensively about my belief that there is an exceedingly large bond bubble; if one believes that such is the case, the implications concerning the level of future interest rates is disconcerting.  A “deflating” or “bursting” of such a large bubble will have widespread negative impacts on the economy and markets.

For reference, below is a chart depicting the recent movements of various (3-month, 2-Year, 5-Year, 7-Year and 10-Year) Treasury yields:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 8-21-13 interest rates

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1642.80 as this post is written

The Bond Bubble – February 2013 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last post on the Bond Bubble (the July 25, 2012 post titled “The Bond Bubble – July 2012 Update“) yields of various Treasury maturities have started to increase.

Here is a chart depicting the recent movements of various (3-month, 2-Year, 5-Year, 7-Year and 10-Year) Treasury yields:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 2-6-13 Treasury Yields since 2011

It should be noted that current rates on 10-Year Treasury Yields, from a long-term historical view, remain extremely depressed.  This can be seen in the following chart of 10-Year Treasury Yields:

EconomicGreenfield 2-6-13 DGS10_2-5-13 2.00 Percent

In fact, even if one takes a view of interest rates from 1790-2011, one can see that the current era of ultra-low interest rates is very much anomalous.  While this era’s ultra-low rates are not necessarily “proof” of an asset bubble in bonds, other characteristics, including those discussed in previous posts, very much indicate that a truly enormous bond bubble exists.

While the duration of this “bull market” in bonds is outsized – and thus gives the appearance that ultra-low rates are not only normal – but such yields will remain depressed indefinitely – as with any asset bubble such seeming stability will prove illusory.  In fact, there are already various indications that the bond market bubble has seen its zenith.

What is particularly fearsome with regard to the bond bubble is its potential for damage once it “pops.”

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

As well, there remains the critical question that I mentioned in the October 4, 2010 post (titled “Thoughts On The Bond Bubble“) with regard to what the “natural” interest rate is:

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?

While I have not spent considerable effort trying to ascertain the level of this “natural” interest rate, I have little doubt that such a “natural” rate on the 10-Year Treasury would be at least 5%-10% and most likely considerably higher (possibly multiples thereof).  Of course, such rates would have massive implications on a number of fronts.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1511.10 as this post is written

The Bond Bubble – July 2012 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last post on the Bond Bubble (the February 21 post titled “The Bond Bubble – February 2012 Update“) yields of various Treasury maturities have continued to decline and many have been establishing all-time lows in the last few days.

Here is a chart depicting various Treasury yields from 2007 as seen in Doug Short’s blog post of  July 24 titled “Treasuries Update:  More Historic Low Yields” :

It should be noted that current rates on 10-Year Treasury Yields are, from a long-term historical view, extremely depressed.  This can be seen in a monthly chart of 10-Year Treasury Yields dating back to 1994, on a LOG-basis, with a red trendline shown:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

Many investors, including those very prominent, currently believe that the biggest threat to the future value of bonds is inflation.  While I believe that the threat of inflation is a concern, there are various other factors that pose immense threats as well.

As I wrote in the August 15, 2011 post (“The Bond Bubble – Update“) :

While this Bond Bubble may have a little more “upside” left to it, I am of the belief that attempting to derive gains from bonds at this point is akin to “picking up pennies in front of a steamroller” – i.e. there is little to be gained, and much to be lost.

While the Bond Bubble continues, its risks to investors, financial markets and the economy in general has in no way diminished.

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1337.88 as this post is written

The Bond Bubble – February 2012 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last update on August 15, 2011 (“The Bond Bubble – Update“), the yield on the 10-Year Treasury has roughly been in the 1.7%-2.4% range.  This is seen in the 3-year daily chart, LOG-basis, as shown below:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

It should be noted that current rates on 10-Year Treasury Yields are, from a long-term historical view, extremely depressed.  This can be seen in a monthly chart of 10-Year Treasury Yields dating back to 1994, on a LOG-basis, with a red trendline :

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

From an even longer-term perspective, looking at a 222-year chart of long-term interest rates, which uses the 30-year bond when available, one can also gain a perspective on today’s abnormally low yields.  As seen on that chart, current yields on long-term interest rates have only been lower in one other time period in the 222-year history, with that other period being roughly 1940-1955.

Many investors, including those very prominent, currently believe that the biggest threat to the future value of bonds is inflation.  While I believe that the threat of inflation is a concern, there are various other factors that pose immense threats as well.

As I wrote in the aforementioned August 15, 2011 post:

While this Bond Bubble may have a little more “upside” left to it, I am of the belief that attempting to derive gains from bonds at this point is akin to “picking up pennies in front of a steamroller” – i.e. there is little to be gained, and much to be lost.

While the Bond Bubble continues, its risks to investors, financial markets and the economy in general has in no way diminished.

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1361.23 as this post is written

The Bond Bubble – Update

In previous posts I have discussed the Bond Bubble and its many facets.  In particular, I would like to highlight my post of October 4 2010, “Thoughts On The Bond Bubble.”

During the recent market tumult, bond yields have once again dropped sharply to very low levels, as seen by the yield on the 10-Year Treasury.  A couple of charts illustrate this.  First, a weekly long-term chart from 1962 as seen in Doug Short’s August 12 blog post titled “Treasury Yields in Perspective“, with 10-Year Treasury Yields shown in blue:

(click on chart to enlarge image)

Next, a 3-year daily chart of the 10-Year Treasury Yield:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

While this Bond Bubble may have a little more “upside” left to it, I am of the belief that attempting to derive gains from bonds at this point is akin to “picking up pennies in front of a steamroller” – i.e. there is little to be gained, and much to be lost.

While the Bond Bubble continues, its risks to investors, financial markets and the economy in general has in no way diminished.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1194.20 as this post is written

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

Identifying The Housing Bubble

The Boston Federal Reserve recently came out with a report dated August 12 titled “Reasonable People Did Disagree:  Optimism and Pessimism About the U.S. Housing Market Before the Crash.” (pdf)

A sentence from the abstract is particularly interesting: “We conclude by arguing that economic theory provides little guidance as to what
should be the “correct” level of asset prices —including housing prices.”

My comments:

This is the latest effort from The Federal Reserve which questions whether asset bubbles,  in this case the Housing Bubble, can be accurately identified as they form.

While one may argue as to whether economic theory can accurately spot asset bubbles, there definitely is a chronic need to do so – as well as to take proper remedial action.  As I wrote in an April 8 post, “Our societal inability to spot and prevent asset bubbles is problematical.”  We simply can’t afford to go through numerous asset bubble booms and busts.   This issue is especially critical now given that there are numerous large asset bubbles currently in existence on a global basis.

A Special Note concerning our economic situation is found here

SPX at 1079.47 as this post is written