I (Invictus) posted here about a debate in which David Rosenberg squared off with Jim Grant about whether “bonds are for losers” or if, as Dave likes to quip, “bonds have more fun.”  At the time of the debate the 10-year was hovering around 4%.  At the time of my post it was about 3.4%, and is currently around 3.20%, give or take.

Among the bond-bullish arguments Rosie makes is an analysis of the $68 trillion household (and nonprofit) balance sheet and what, exactly, households (and nonprofits) own (all this data is captured in Table B.100 of the Fed’s Flow of Funds report, released last week).

Here is a pie chart showing the relative insignificance of treasuries and munis on the household balance sheet:



For some historical context, below is the percent of treasuries plus munis as a percent of total household assets for the last 58 years.  It bottomed at the end of 2007 and has been on the rise since.  So the argument can be made — and it’s one that Rosie makes — that although there has been plenty of supply, there should be sufficient demand to soak it up.  Parenthetically, I’d note that demographics — back to that aging boomer population — lend support to the argument that demand for treasuries should remain adequate (as coming higher tax rates argue for support of the muni market).


Adding a question to those who insist that bonds are in a bubble and that interest rates must go up:

Below is a chart of 10-year Japanese bonds (JGBs) for the past eight years, which is all the Ministry of Finance website has.  Why is it a foregone conclusion that our experience must be different than theirs?  Seriously.  What are your thoughts?

10-Year JGB

Category: Fixed Income/Interest Rates

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “On the Treasury “Bubble””

  1. dead hobo says:


    I don’t know how to break this to you, but there’s an unimaginable amount of sovereign debt floating around and someone owns it. If it’s not households, then it’s either funds or maybe it’s tree pixies? Actually, who cares who owns it? It’s still public debt. And most of it was issued to support Consumption, not Investment. And inter-period equity is only a textbook concern. The basic approach is to assume someone who hasn’t been born yet will deal with the liability. It’s always been this way and it will be this way until the bubble bursts.

    Speaking of debt “bubbles”, what planet do you spend most of your time on? If Europe wasn’t having a debt crisis and the UST-10 wasn’t a flight to safety objective, then the rate on the 10 would be high and climbing. About a year ago, I mused about an engineered stock market crash to create a flight to safety in public debt for the purpose of keeping rates low. Instead, we have a Euro crisis and toxic European debt doing the job. The stock market is going to fall on it’s own thanks to no new oceans of money coming from the Fed. Is Europe’s situation organic or has it been helped along by dark shadows?

    Anyway, even if households can afford to load up on new savings bonds, the debt still has to be paid back and interest still needs to be paid. Since low interest is better than high interest for the payer of that interest, and since the UST needs to practically double the national debt in the coming decade or two,I wonder if various new and even more interesting events will transpire in the future to keep rates low.

  2. baychev says:

    Unlike treasuries, prices of equities and homes are much more sensitive. People will not sell their home to lend money to treasuries, even if they do, someone will need to find the cash to make the sale happen, either way, the same amount of money has to be tied in homes. The same applies to equities but with the oddity that they are priced at the fringe: a negligible in size sale that pushesh the indices down 1% shrinks the net worth 0.27%…
    So, actually only the cash equivalent matters. Does it include money market funds? If yes, then it cannot be relied upon to mop treasuries supply.
    The only reliable source left is future income. But why buy treasuries earning 3% for 10 years rather than pay off debts at 6% interest rates and above?

    Are the Fed and China/GCC the only reliable funding options left for the UST? It may as well be so.

  3. Greg0658 says:

    on bonds or stocks .. my opinion = if the masses would go back to bonds in mass the corporatist who are gaining more and more capture on us little folk would be REVERSED (painfully tho)

    put another way .. in the building buildings market for J6P and that industry of industries manufacturing substructure .. low interest rates are making a mess of the creation / consumption / destruction Realm .. low rates perceivably a 1/4 percent to the chosen are building buildings for the investment of it and the government doesn’t seem to mind for the new property taxes add the work flow for J6P and his taxbax to the system

    investing in corporate stocks may make you money as an investor (for now) .. but the corporation trust holds the trump card (always) .. throw in the flash crashes and the HFT don’t be surprised if someday your don’t even own the corporation you help get TBTF and your outside looking in

  4. philipat says:

    And DR disagreed with “The Bond King” who, at the time, was also “advising” all to sell Treasuries.

    Credit where due (Excuse the pun)?

  5. insaneclownposse says:

    This is an interesting debate. What’s remarkable about the pie chart is the huge ownership of equities even after the punishing bear market of the last decade. How is that even possible? In my opinion, stock holdings reflect the power of Wall Street marketing campaigns. Equity ownership has been drilled into the brain of every television-watching american for the past 20 years – to the point where they are willing to take a 20% (or more) lasting hit to their net worth.

    If the government wants a similar response in order to fund the deficit – which is $1.5T btw – they are going to have to launch some type of marketing/propaganda campaign. And they better do it fast!

    My own feeling is that, unfortunately for the Treasury bulls, the perception by the general public is that the U.S. is flat broke. Perception is reality unfortunately. We are not the Japanese people, who started their deflationary adventure floating on a massive raft of cash savings. We are americans – the most indebted people in the history of the world! Are we going to loan our own deadbeat selves more money at this point?

    Short of a war, I think it will be very challenging to convince U.S. citizens to loan the government any more cake. If it was a simple matter, then the country’s debt structure would probably look a lot different. Show me considerable issuance at longer durations and I’ll start to listen to the bulls. Right now, the structure is a powder keg. If the Treasury market gets spooked at all, the game is up.

    The heart of the crisis is that the U.S. economy got too large and distorted relative to what it can truly support. After the collapse, there is too much ground to be made up without devaluation.

    Oh yeah, and it didn’t help that the global financial system collapsed because of fraud.

  6. inessence says:

    @ dead hobo…debt does not have to be paid back, at least for governments, as the game has become to simply rollover the maturities (see Japan). The problem arises when bond vigilantes require higher risk premia for buying the paper, and the funds holding in trust this debt on behalf of their constituents post declines in NAV. At that point ma and pa kettle will learn that indeed losses do occur in U.S. government mutual funds. Gold anyone?

  7. CrispE says:


    The issue for the individual investor is always going to be “where can I make money?” Bonds offer a solid investment opportunity in a questionable economy because stocks ultimately reflect economic conditions.

    Bond funds offer an alternative to stocks. When you hear this “bubble talk” you must consider where bonds have been in other economic downturns (like 2008-2010) and whether the current response is greater than that one. So….considering continuing softness in employment, retail, home sales, Europe, etc., do bonds reflect an over-reaction?

    When the 10 year bond was at 4.0% the “noted economists” thought the market was headed back to 14,000 and bonds to 5.25%. Now, only 80 basis points difference, they say it’s a bubble. But this is psychology, not an economic fundamental basis for making decisions.

    Your analysis is correct and I thank you for it.

  8. [...] How realistic is all this Treasury bubble talk?  (Big Picture) [...]

  9. dead hobo says:

    CrispE Says:
    June 18th, 2010 at 12:03 pm

    When the 10 year bond was at 4.0% the “noted economists” thought the market was headed back to 14,000 and bonds to 5.25%. Now, only 80 basis points difference, they say it’s a bubble. But this is psychology, not an economic fundamental basis for making decisions.

    Please learn bond math. As interest rates rise, bond prices decline. As interest rates decline, bond prices rise. This is known as a ‘fundamental’. It is not based on psychology. Bond math is bond math.

    Therefore, the question is “How far can interest rates on UST debt fall?” At some point they must begin to rise. This is when the bond bubble will burst. It is a mathematical certainty, not psychology. Unfortunately, most people, even those who claim to be a part of the financial luminati, are clueless about bond math and its ramifications.

  10. Invictus says:

    @dead hobo

    I guess I reside on the same planet as Rosie, whose work I cited as the basis for my post, who has been hammering on this theme for many months, and who yesterday — and again today — happened to reiterate his position:

    “As we wrote in yesterday’s (June 17th’s) Breakfast with Dave, in the U.S., long bonds and corporate credit are both outperforming equities so far this year. We believe that this outperformance will continue as the 78 million boomers turn towards income generating securities after seeing two bubbles burst less than a decade apart.

    “The household asset base continues to be light on fixed-income securities; however, that is likely to change as Chart 3 below shows. As of Q1, nearly 3% of household assets are in U.S. treasuries and municipal securities, compared to 1.5% back in Q4 2007. This is just another way to show where households are allocating their savings; and this process likely has much further to run.”

    His “Chart 3″ is essentially my Chart 2 (the second one above).

    Cheers from Alpha Centauri.

  11. Invictus says:

    @dead hobo

    It would appear that the Japanese experience — a decade plus of rock bottom rates — while not absolutely discrediting your statement that “at some point they must begin to rise” (which, of course, must ultimately be true), certainly leaves it as an open question as to when that “must” happen, does it not?

    And, by the way, I recall all too well when yields on T-Bills were momentarily negative — so one can’t even say they can only go to zero; they can apparently — if only for a nanosecond — go below.

  12. Transor Z says:

    What, exactly, IS the “household” sector in the Flow of Funds report?


    Cuz, you know, I don’t like to stir the pot or anything… ;-)

  13. Transor Z says:

    BTW, maybe start off all of your pieces with “I, Invictus…” kind of like “I, Claudius”

  14. Invictus says:

    @Transor Z

    Thanks for the link. Will check it out for sure.

    Regrettably, I’m not sufficiently self-absorbed to go the “I, Invictus” route (though I’m really not sure how else to get the point across sometimes). But I did get a hearty chuckle out of it.

  15. Invictus says:

    @Transor Z:

    Here is how the Fed describes the “Household Sector”:

    For most categories of financial assets and liabilities, the values for the household sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the household sector. For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government, and the balance is assigned to the household sector. Series calculated in this manner are so identified in the table and carry a reference to the instrument table (for example, table F.209) that lists the sector included in the calculation. For a few series, such as consumer credit, data for the sector are available directly and are not calculated as residuals. When microeconomic data are available (such as the data available from the Federal Reserve Board’s Survey of Consumer Finances), asset and liability totals for the sector are reviewed in light of that data, and the flow of funds series are sometimes adjusted to take into account the additional information.

    I do not subsribe to the notion put forth by TrimTabs that “the “household” sector does not exist!”

  16. Transor Z says:


    Yeah, me neither. But I think it’s safe to say the truth is somewhere between the two extremes: there’s a lot more in there than just “household” assets but it’s probably not complete fiction either. A residual category is problematic IMO to make statements about “household” behavior in the IRS sense of “household” when the catch-all category composition is a little… sketchy. For example, a lot of multi-billion dollar health insurance companies are non-profit and we know they’re heavily into the markets/secured instruments. Biderman insists hedge funds are also in there but I have no opinion on that.

    So I’ll conclude with a “I’m just sayin’” and leave it at that. Have a great weekend.

  17. VangelV says:

    How exactly will municipalities, states and the federal government pay off their debts to bondholders without destroying the purchasing power of the USD or driving the economy into depression?

    The answer is simple. They can’t. That means that they must either default, in which case bondholders take a big loss, or pay off the bonds with newly printed paper. In either case the long term trend is clear. The bull market for bonds is now over and all debt denominated in fiat money will prove to be a loser over the long term.

  18. Simon says:

    I’m with Rosie and Invictus. In case anyone cares. The important point now is WHEN. IF is not the issue. Arguably WHEN will be just before the real real trouble starts so it’s well worth keeping an eye on the trend.

  19. CrispE says:

    Dead Hobo:

    It is you who should learn some math. The economists were predicting that bond values would FALL and rates rise, but the very opposite happened. Were the bonds fairly valued at 4% for the 10 year bond? Hardly! They were way undervalued, but the psychology was to drive the interest rates up as they were short. Now, they (and perhaps you?) are down 15% and trying to lay a psychological foundation for driving money out of bonds and into stocks.

    But the factors that drive bonds up: strong employment and rising inflation are nowhere to be found, are they? Bonds, are in fact, still undervalued on the long end of the curve.

  20. foosion says:

    How will governments pay off debt to bondholders? A booming economy with a reasonable tax policy, while maintaining the ability to roll debt, would seem to be part of the answer. Cutting the long term deficit would be be helpful. Fixing healthcare would do it. If the US could bring its healthcare costs into line with the rest of the developed world, we wouldn’t have a deficit problem.

    Aren’t households the ultimate owners of just about everything, including treasuries and equities, often indirectly through mutual funds?

  21. dougc says:

    Using Japan as a rational argument for stability ignores a significant difference; the Japanese people own almost all of their debt and a msgnificant amount of our debt. The Japanese have an nationalistic interest in stability, our debt is owned by people who don’t care about us . These include China, Middle Eastern governments and the psychopaths that are in control of our financial industry.

  22. dead hobo says:

    Invictus Says:
    June 18th, 2010 at 1:34 pm

    @dead hobo

    It would appear that the Japanese experience — a decade plus of rock bottom rates — while not absolutely discrediting your statement that “at some point they must begin to rise” (which, of course, must ultimately be true), certainly leaves it as an open question as to when that “must” happen, does it not?

    Sorry it took so long to get back. My power went out for 1 1/2 days due to a massive rain storm and only just returned last night.

    If you are counting on an even more broken financial system to replace the severely damaged one that exists now … which still has potential to return to a functioning state … then OK you win. I am still pollyannaish enough to believe in one that resembles a textbook once again.

    Crispe: I repeat … learn bond math. You conflate simple mathematics with fantasy economics calls. Also, I think you might be confusing up with down.

  23. Invictus says:

    @dead hobo

    “…counting on an even more broken financial system to replace the severely damaged one that exists now…”

    Would not say that I’m counting on it. I do, however, probably see that outcome as more of a possibility than most others.

  24. CrispE says:

    Dead Hobo:

    Well, since you seem to need some counseling, let’s make sure our terms are correct. Bond values rise as interest rates fall. So, if the 30 year bond was at 4.86% and falls to 4.15% (which it did) the bond holder makes 15% . Agreed?

    What pressures bonds to fall in value (thus increasing interest rates)? Strong employment and higher inflation are two of the more important reasons. Agreed?

    Now, will the economoy get weaker or stronger? The case can be made that there is little to no inflation in the system (stagnant wages and high unemployment). Some of us believe those problems are getting worse (we would be the ones with the numbers that verify our analysis, like rising claims while people are getting cut off of benefits, a loss of 9 million jobs in the last several years, low CPI increases).

    And interest rates will go higher because?

  25. dead hobo says:

    CrispE Says:
    June 20th, 2010 at 10:28 am

    What pressures bonds to fall in value (thus increasing interest rates)? Strong employment and higher inflation are two of the more important reasons. Agreed?

    Not any more. Remember, the Fed used $1.3T to buy down long term rates. This kept rates below 4% during the program. When one would normally expect rates to rise after all the Fed fuel was expended, we have a just-in-time Euro and toxic European debt crisis. Rates on LT debt are even lower now and bond capital gains are large. The real question is, how long will fantastic efforts and fantastic coincidences keep rates far below historical and projected values? Eventually, this artificial gravity will fail and rates will rise to the heavens. So the real question is “Will the US go Japanese and manipulate the economy as Invictus suggests?” (very possible, but remember, a manipulated bond market implies a manipulated stock market)

    If so, then this will destroy the capital markets in favor of supplying the UST with cheap debt. Only newbies who believe the investing texts, gullible elderly relatives who believe their financial advisers, and HFT will be in the capital markets. Thus, the only real purpose of the financial markets will be to supply the UST debt monster. Everything else will be to fool the rubes.

  26. Greg0658 says:

    “30 year bond was at 4.86% and falls to 4.15% (which it did) the bond holder makes 15% . Agreed?”

    that statement is true ie to your neighbor you made money .. yet you are making money via the interest and if it doesn’t keep up with inflation than no you are not making money because it the money will need to be re-invested in the future at a lower interest rate than now – putting you further behind inflation

    does inflation exist – it must – just disguised – for more and more people want what the globe has to offer and not everything is renewable

    in a long drawn out battle – yes bonds make money if you sell the bond to another who wants a better return than present and does not have the ability to find better interest on the money ..

    does investing in stocks make money – they should if corporations create more than they take – but the organization of the corporation is to capture for themselves – the select selves
    … rube off .. with trade rules but the people who make the stuff rule more if ya let them get TBTFight

  27. cognos says:

    Roughly 50% of US Treasury debt is in bills.

    So quoting 10-yr and 30-yr as your reference points for “bonds” is a little narrow minded.

    In 6 month bills… you’ve been making around 10 bps for 18 months now!

  28. CrispE says:

    Dead Hobo:

    What you say is partly true. But consider the amount the banks are putting into the long end of the bond curve. Why would they invest in the bonds if they could make money on loans, especially at a time when the U.S. is “supposedly” coming out of recession. This couldn’t be farther from the truth. The banks know that that business will continue to be soft, making the bonds a no brainer with a strong upside (notice that they buy 4% interest, give out 0.5%).

    You are basing your analysis on the concept that bonds will be “feared” because of debt. Hehehe. Not so. The “fear” in bonds is that we would default. But the U.S. asset base and ability to raise capital is more than capable of sustained bond sales at low rates.

    So, the key to lower and lower interest rates (and higher values for bonds) is still a soft economy, spurred by banks not lending money and a government that has large assets to draw from. From my perspective that is why the next level to think about is the 30 year at 3.7, where it would meet technical resistance. But give me DOW 9000 and I think we have a good chance to get there.


    No doubt the short end of the curve is about as low as you can get it (barring a complete collapse of the economy) which is why Bill Gross and others are getting into the long end of the curve. You will also note that the central banks have been buying more on the long end (look at the bid to cover ratios on the more recent auctions). I have always seen the short end of the curve as the “will the FED raise rates soon?” end, not as an economic barometer. So, where the short end is now, I’d say you can look forward to at least several quarters without change and perhaps years.

  29. [...] Hmmm…sounds like a familiar theme. [...]

  30. [...] current situation.  (Some of my previous posts surrounding demographics can be seen here, here, here, here and here, to cite but a [...]

  31. [...] current situation.  (Some of my previous posts surrounding demographics can be seen here, here, here, here and here, to cite but a [...]