Is the bond market in a bubble?


As interest rates trend toward a zero percent yield it seems most traders and analysts are calling the interest rate market a bubble. Some are calling it the greatest bubble in years, and one that is about to burst wide open. That argument does seem logical on the surface. It doesn’t seem to make sense to tie up money for two years at less than a quarter percent, or ten years at less than two percent, which is a negative yield after figuring for taxes and inflation. It seems that the bill, note, and bond market must head down soon. However, that argument has been around for some time. That seemed to be the consensus a year ago, yet the bond market was one of the best performing markets of 2011, as illogical as it might seem. Can interest rates still head lower from these seemingly impossible levels? It seems so. That is the case in Germany right now.

Of course these very low yields are for the perceived safety of government dept. There’s little intrinsically safe in any government dept other than the fact that they can print their own money when they run out of revenues, unlike everyone else. But there is a wide spread between government dept and various levels of corporate dept, especially in the lower rated issues. Investors are being paid high yields relative to the risk on the lower rated corporate side. These are unusual times, and they may be around a bit longer than most traders think.

It would seem obvious that with governments running up dept like crazy, with the eventual need to monetize that debt, that inflation would be starting to get priced into these markets, with yields starting to rise and bond prices dropping. Yet just the opposite is happening, so far. Bernanke has said that interest rates will stay at these low levels for at least another year or more. But markets tend to discount the future and so far they aren’t discounting much inflation.

Perhaps deflation is the larger fear. Perhaps the analogy of pushing on a string is still relevant. Until jobs and spending resume it will be difficult to have any pricing power no matter how much the governments around the world try to destroy their currencies. The resumption of more normal times may be a long way off.

Most traders I know, and some very smart traders, are heavily short bonds with very large and mounting losses. They all seem to have thrown their money management out the window. It seem so obvious that this bubble will soon burst, but what seems so obvious is usually wrong. The weekly chart above shows that the trend is still up. The momentum indicator in the middle sub-graph got a bit overbought and has kinked down, but the trend indicator is still up and the adaptive CCI in the lowest sub-graph is still hovering around the +100 line, indicating the trend is still alive. Meanwhile, I’m leaving the short side of this market alone from a trading point of view until these indicators indicate that the trend has changed direction. And I’m parking some money in the high yield end, as those spreads seem to be well compensating investors for the risk, especially in diversified bond funds (as boring as that sounds).

2 thoughts on “Is the bond market in a bubble?

  1. Hi Mister Tucker
    Well, this is an another classic market situation:
    Everybody knows about the bubble , everybody sees the bubble
    It is so f**king obvious …
    My only question is:
    How is that dumb money sucker , who is going to take the other side of your trade when you short that T-Bond or T-Note ?
    The so called commercials ?

  2. Hi Mister Tucker
    Well, here we have an another classic market situation:
    Everybody knows about the bubble , everybody sees the bubble
    It is so f**king obvious …
    My only question is:
    Who is that dumb money sucker , who is going to take the other side of your trade when you short that T-Bond or T-Note ?
    The so called commercials ?

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