Top of Mind: Bond Bubble Breakdown

Top of Mind: Bond Bubble Breakdown

Published April 22, 2013

Hi all, just out with a new Top of Mind: Bond Bubble Breakdown. Near multi-generational low bond yields, driven at least in part by US Federal Reserve asset purchases, has pushed the question of whether or not the bond market is a bubble to Top of Mind.

Issue includes:

· Interview with Professor Martin Feldstein of Harvard: the bond market (and many other substitutable assets) is a bubble, which won’t take much to “pop”. And the Fed and its asset purchase program are to blame.

· Interview with Francesco Garzarelli: Extraordinarily low bond yields have resulted from many fundamental and rational drivers (expectations of weak economic growth and safe haven flows amid the European sovereign debt crisis) in addition to Fed purchases. So while bond prices look expensive, there is nothing particularly bubbly about the bond market today. Bu the market is too complacent about the prospect of rate hikes.

· Interview with Paul McCulley (former PIMCO partner): the bond market is “rich, but rationally rich” and definitely not a bubble. The Fed has done everything right so far and could do even more in the future (like Japan!), which might be required to get the US out of its “liquidity trap” (nobody is borrowing despite the fact that borrowing is cheap because the private sector is still recovering from a “huge party of leverage” that kicked off the global financial crisis) .

· Is the Fed worried about a bond bubble? by Kris Dawsey: not particularly.

· The “Great Bond Massacre” of 1994 by Charlie Himmelberg: A policy surprise and resulting sell-off comparable to 1994 are much less likely in the current environment. And the lessons for risk markets are surprisingly benign.

· Has gold been the real bubble? by Jeff Currie and Damien Courvalin: some characteristics of gold do look bubbly

As always, feedback welcome
Allison

Top of Mind archive:
Euro Area – What’s Next? July 12, 2012 Click here
Staring Down the Fiscal Cliff August 8, 2012 Click here
Oil on the boil – again? September 6, 2012 Click here
The Big Ease October 3, 2012 Click here
US Election Inspection October 24, 2012 Click here
Demystifying the China Handover November 5, 2012 Click here
Catastrophes and Climate December 11, 2012 Click here
Special Issue: 2012 update, and a peek at 2013 December 20, 2012 Click here
Japan: On the Edge of Catharsis or Crisis? January 17, 2013 Click here
US Housing on the Hot Seat February 13, 2013 Click here
Currency Wars on the Front Line March 26, 2013 Click here

Allison Nathan - Goldman, Sachs & Co.

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