Yesterday, I asked if Bonds Resemble Dot Com Stocks?.  The night before, I mentioned it on Fast Money, so I got to beat a few others who wrote it up. (Note that mine is a nuanced view, and not a full bubble claim).

I could not help but be amused by who is — and is not — in this camp:

In the full blown bubble camp are Nassim Taleb, Doug Kass, Jeremy Siegel and Jack Crook, Fortune and Smart Money;  Disagreeing with this notion is Brad DeLong and Pragmatic Capitalism; Minyanville is somewhat ambiguous, as is Zero Hedge.

In the Bonds are attractive in a deflationary environment are David Rosenberg and Gary Shilling;

According to the latest Commitments of Traders data, net positions in the 10-year and the long bond do not appear to be at extreme levels.  Large Speculators are still net short both of these markets.


Bonds have been in a 30 year bull market, ever since Volcker broke the back of inflation; The 10 year peaked in Fall 1980 over 15% yield, today they are at 2.6%.

10 year Bond, 1980-2010

via Economagic

Category: Markets

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.

39 Responses to “Bond Bubble ?”

  1. scottsabol says:


    Just finished reading Bailout Nation. Great book and eye-opening to say the least.

    Was there any talk of reenacting Glass-Steagall or the Financial Services Modernization Act of 1999 in the Financial Regulation Bill past a few months back?

    Scott Sabol

  2. Adyt says:

    bubble or not I think they are going to correct for a while.

    we might start seeing some benign inflation data for a few months from here. i posted a chart on my blog that suggests that. link to the pic:

    note that the series for the cpi is turning up. in the past it went up for at least a few months after turning from this level.

    also, a quite probable stock market rally from here and the media sentiment towards bonds support the view of a correction.

  3. Adyt says:

    P.S. the series is the 3 month average of the monthly percent change in CPI

  4. dead hobo says:

    First, I don’t think you were jumped on about this. The discussion looked fairly normal and a little more intelligent than many others.

    At first, I went with the conventional wisdom. After all, oceans of money are flowing into government bonds from virtually everywhere. Yields are at historic lows that, to me, were unimaginable a few weeks ago. In addition, we just had two massive stock bubbles and one real estate bubble, courtesy of Fed manipulations, inept securities regulation and enforcement, and stupid law making. Another bubble, this time with UST securities, enhanced by Fed policies, follows the script perfectly. And, like any bubble, what blows up must eventually blow up.

    In retrospect, this is far too simplistic.

    This reasoning ignores interest rates as a reflection for the supply and demand for money. It ignored the uses for borrowed money, which predominantly include business investment and consumer purchases of large items. If demand existed for private uses of borrowed capital, UST rates would be much higher beyond the Fed managed short term rates. Especially in the face of massive deficits crowding out this private borrowing. There would be competition for available scarce funds.

    Logically, rates should be higher because there is a demand for funds outside of UST needs. Where is it? If rates are low because of no demand, then Investment and Consumption of Durable Goods must be low. If both were competing with UST requirements, then this would be reflected in jobs, private investment and spending. Where are they?

    If capital investment is low then the companies that require it are on hold. To me, not growing for an extended period of time equals stagnation. If the companies reflected in the stock markets are stagnant with respect to investment, then it is a closed system in decline and not a growing system. If they were growing, private demand for borrowed capital and interest rates would both be rising. If rates are falling, then private demand must be non-existent.

    So, are bonds in a bubble or are stocks in another bubble since their current levels don’t match a logical examination of why companies grow and how companies are valued? This raises more questions about stock valuations and the velocity of money in the stock market. Are valuations more of a reflection of high HFT velocity than actual investor demand for equity investment? With oceans of money flowing into UST debt, I suspect equities are pure asset bubble and more likely to fall to a level that reflects low rates than rates are to rise to the current level of equities.

    Sorry to disagree with your buddies, but can they provide an alternate explanation that doesn’t require sell side enthusiasm or knee jerk paranoia to make believable?

  5. call me ahab says:

    Note that this is a nuanced view, and not a full bubble claim

    pulling your punches again it appears-

    have you considered that people aren’t rushing into treasuries to get rich? Parking money out of uncertainty.

    and then we have people like Venndata (previous bond thread) equating the people who are putting money into treasuries are the same very same people who are against Obama???? Venndata has gone full retard obviously

  6. Ahab

    Read the original post.

    I know it doesn’t play well on TV, but here in print, we can engage in nuance, subtlety, shades of gray discussion and debate.

    For those who prefer black & white, bull / bear debates, well, there are those channels where folks can tune in to see that sort of nonsense

  7. this Kyle Bass i-view on CNB-Circus (h/t “HelicopterBen”) lays out his view of “ZIRP as a Trap”, “Sovereign ‘funding Gap’”, “necessary ‘Restructuring’(to much Debt)” (y mas)..

    LSS: Non-Linearity dead ahead– the timing of your, personal, ‘Event Horizon’ may be variable..

    also, I think it would fair to characterize Janet Tavakoli as being ~in the same Camp.

    as an aside (not to be asking ‘Stupid Questions’), Why doesn’t she get more ‘Play’(in ‘the Media’)?

  8. dead hobo says:

    The only way a ‘bond bubble’ can explode is if rates rise quickly. Japan is an example of low rates in perpetuity, so support for the idea of a bubble that is resistant to bursting exists. Sudden corporate growth creating an alternate demand for capital would do it. Shenanigans from traditional buyers of UST debt might do it (china). The Fed acting responsibly and not monetizing every IOU it sees might do it. Sudden and ginormous massive demand for equities from real investors might do it.

    To put it in other words, massive economic recovery or massive catastrophe will cause rates to rise. Massive recovery on short notice seems unlikely in the near future. Since the UST is the proverbial coffee can in the back yard, catastrophe is unlikely also.

    The shift into UST debt is not a get rich quick with free money scheme like the past bubbles were. It’s the ultimate flight to safety because no plausible alternatives exist. The word ‘deflation’ as it has been used in this debate, is too simplistic to continue using. Hunkering down and spiral contraction seem better to me.

    So, if low interest rates and the flight to safety are logical and are happening for good reason, then equities must be grossly overvalued.

  9. Mike in Nola says:

    Boy, BR, I just wasted 15 min’s posting what I thought was a reasonably cogent answer to Doug Kass’s comment on the previous thread :(

  10. VennData says:

    What the meme “…The only way the bond bubble bursts is if rates rise quickly…” forgets is that if investors “never sold” dot com stocks, then we’d still have

    The nineteen out of twenty working people in this country are going to buy stuff. It’s America. …and the measly returns on gov’t bonds won’t satisfy the retirement calculator’s inconvenient arithmetic.

  11. foosion says:

    You can hold a treasury to maturity and get paid off at par. Treasuries with reasonable maturities are not trading at 150% or 200% of par. You’re not going to lose 50% or 75% of your investment. Compare tech stocks 10 years ago. One situation was a bubble, the other is just high prices.

  12. KidDynamite says:

    barry – don’t miss TPC’s piece on it:


    BR: I already have that link above (Pragmatic Capitalism)

  13. dead hobo says:

    Mike in Nola Says:
    August 19th, 2010 at 9:07 am

    Boy, BR, I just wasted 15 min’s posting what I thought was a reasonably cogent answer to Doug Kass’s comment on the previous thread

    I read it. I personally wouldn’t answer Kass because he’s always wrong about the things I sometimes notice him talking about. He must be right on the things I never see, otherwise he would be out of business. But, since I read him here, he must be wrong. Conversely, if he had only kept that opinion to himself, he might have changed history. Shit. He’s talking recovery because it must be so because it’s always been so. The last two market rises were due to big bubbles and the next rise will be based on the historical need for markets to repeat themselves. Rainbows and big eyed friendly unicorns await. Why learn economics when markets are ruled by magical influences.


    BR: Doug is always wrong? I have to beg to differ with you on that

    He and I often disagree, but he is right more often than wrong — especially about the big things

  14. hawkingvalue says:

    @ dead hobo @ 8:44am – Well said.

    In my opinion this is not a “bond bubble”, it is simply an overbought asset class. And as we have learned before, when a sector begins to feel/look/taste overbought, it is generally in one’s best interest to look elsewhere for a better return/risk profile. That is unless you believe we are headed into a doomsday scenario…than the coffee can (i.e., UST) is perhaps where you want to put your money.

    Myself – I’m searching for the catalyst that entices UST bond investors to switch back into equities. Three plausible catalysts are 1) corporate M&A – which we are starting to see more of (BHP, INTC) as companies put cash/cheap capital to work, 2) private equity opening their fund coffers and stepping up take-private deals (remember private equity is built on cheap financing) or 3) investor malaise with UST yields vis-a-vis large caps stalwarts yielding 3-4% that have broad international exposure (i.e., MCD, JNJ, PM, etc.) that provide downside protection to a stagnate US economy.

    I’m not advocating that the market is poised for a break out. Simply that I personally feel there are perhaps better reward/risk opportunities in the marketplace than a 2.65% yield over ten years.

  15. bookokane says:

    Gary Shilling never met a bond he didn’t love. But, don’t knock it (yet); he has done well overall.

  16. X on the MTA says:

    In general, I think bonds have limited potential to enter “bubble” territory right now because their value has a natural cap (that they trend to as maturity approaches) and because bubbles–in my mind at least–require massive amounts of credit to finance the purchases of the asset in a bubble, and that demand for loans would, you know, be reflected in higher interest rates that would halt the appreciation of bonds.

  17. AHodge says:

    heres shades of grey
    went short TBT at 38 with jan 11 put leaps
    just mostly covered by writing jan 11 29 strikes (like a covered short write)
    i think it will roughly stay around here. The interest rate volatilities are statospheric. i will bet against big moves the rest of year– watch them decay. if econ gets really bad i will take th low end 29 puts off.
    i repeat since my last got zero traction

    securitization of asset backed dried up and nonfunctioning– there is a bond supply shortage.

    the fed is threatening qE2

    without those two treasury yields would be over 3% even with a mild recession
    repeating blogs generally bad form
    but please guys….and gals

  18. mrmike23 says:

    I have most of my pile in Treasuries. Why? Because I remember in 2008 when the geniuses who ran the 401K for my company could not see what I was seeing and tried to keep me “invested” in the stock market. I moved all that money into a bond fund early that Spring and am very happy I did. So we had a “recovery” and a lot of the money came back to stocks but it was not because of any good news, only businesses cutting staff and restocking.

    Now why would I sell my babies, my Treasuries, now that we are seeing all the problems with the PIIGS, no new “thing” to get everyone excited about to get the economy moving, a joke as a President who hasn’t a clue, possible bombing of Iran by Israel, job losses, no real estate market? So I lose a little because of opportunity costs, but, tell me, where else would I put my money? I get 4.5% on most of my treasuries. It beats annuities since I get my principal back someday(or my kids do).

  19. inessence says:

    Clearly a secular shift into fixed income. The average joe sees the manipulation of the equity markets by HFT and other insiders and after getting hi/her ass kicked over the last ten years or so, return of principal is more important than return on principal. Equity market participation is pumped and hyped by the financial services industry (commission brokerages) when the risk of owning equities is/has not been clearly understood by most of the investing public.

  20. Mike in Nola says:

    X – good point, although I suspect the hedgies and prop desks are using leverage as they always do. There will probably be a pop in rates when they decide to take profits, but no fundamental reason for them note to settle back lower.

  21. inessence says:

    Nice smack-down by Rosie on Jeremy Siegal & Jeremy Schwartz in Rosie’s comment today. If you are in the “bond bubble” camp digest Rosie’s read today.

  22. AHodge says:

    no doubt folks are easily scared out of equities after what happened in 08. i have seen no proof at all that it is “secular” and permanent, and not just still in the bad “cyclical” part, its temporary opposite.

    Wall st is betting its temporary. that we can struggle back to get another rip roaring boom going eventually.
    Without changing their ways much, as you point out.

  23. inessence says:

    @AHodge..the proof in the secular shift in bonds will only be realized by the passing of time. But the butt whipping not only in ’08 but in ’00-02, and the increase in volatilityover the last several years will add to the permanency of the shift, as well as the increased risk aversion of the baby boomers as they matriculate in retirement.

  24. U.S. Treasurys Yield to Adversity

    Shades of early 2009? The extreme fear may have gone, but with 10-year Treasury yields heading back toward levels last seen as the global-financial system teetered on the brink, the same question has returned to center stage. Can U.S. policy makers stop the economy drifting towards deflation or will the sheer weight of deleveraging and weak demand be too strong to overcome?

    Even as the Federal Reserve signals it is alert to the threat of deflation and is ready to act, bond yields have continued to slide. The 10-year yield, which hit 3.99% in April, now is at 2.61%.

    Just since Aug. 9, the day before the last Federal Market Open Committee meeting at which Fed officials decided to reinvest proceeds from maturing mortgage-backed security holdings into Treasurys, yields have dropped 0.22 percentage point.

    That underlines the conundrum. The Fed’s recent actions signal it is aware of the risks to the economy. It has made clear it intends to keep rates low for a long time, not just at the short end of the curve, but further out. By announcing it again will buy Treasurys, albeit on a small scale, it has left the door open for bigger purchases. That could push yields yet lower in the short term.

    But if, through such moves, the Fed actually succeeds in reflating the

  25. AHodge says:

    not a bad partial theory but its only partial and only a theory.
    and there are the more obvious drivers.
    people get over butt whippings, that what makes cycles, Will most folks eventually learn that long term returns above 6% like 1980–2000 are not available for stocks?
    but likely not this cycle, not much anyway
    we will see what you say in two years when the economy is cranking and stocks are rising.

  26. AHodge says:

    of course inessence— we likely agree on bond yields now they may be overdone on some measures but cant go up much with Fed ready to buy more, and securitixation not fixed the rest of this year. reallly bad econ they an go down.
    newfound investor wisdom adding to that? a big maybe

  27. says:

    Mr. Ritholtz,

    I definitely do not understand why people wish to call US Treasuries a bubble.. I guess maybe there is a general disagreement about the meaning of the word?

    1. Some use “bubble” to describe anything that seems massively mispriced.

    2. Others use “bubble” to describe something that is mispriced due to the fact that hordes of people think they can become rich by purchasing this thing.

    I fall into category number 2 so I wouldn’t really refer to Treasuries as a bubble.. that just seems sort of silly. Treasuries seem to have such low yield due to the fact that money is being moved into them at a massive rate (insert explanations: [fear,conspiracy,aliens,helicopters]).

    This is the one big point of disagreement I have with Nassim Taleb. He’s frequently made public statements that shorting US Treasuries is something that everyone should be doing.. and I think maybe that’s a little misleading. A lot of nimwits will (and are) out there buying up lots of TBT and asking: “WTF? When are Treasuries going to break? They can’t stay this low forever!! This is the trade of the century!!!”

    Should have shorted TBT (after inventing time machine and traveling back in time). I’m sure that evil (but oh so sexy and smart) octopussy Goldman Sachs is making money hand over fist selling derivatives insuring against the “inevitable, any day now” rocket ship path of US Treasury yields.

    Before the crisis of 2008.. there was less than $900 billion in Federal Reserve Bank credit outstanding.. we are now at around $2,310 billion (with much more on the way, I would figure).

    This core monetary base is over 2.5 times higher than it was in August 2008.. yet the DJIA and SPX are about 10-15% lower (with QQQQ flat) and GLD is only 30% higher.

    Something sure seems very wrong with the total money supply.. beyond just M0,M1,M2 and M3, and I’d figure that M0 is going to have to increase a lot more to compensate for the shrinking M∞ in the system (this is my pet symbol for all that stuff beyond just M3.. the stuff that creeped into the system and was propped up by $60 trillion notional CDS at the peak and nearly $300 trillion notional in interest rate swaps [I suppose others refer to this as "the shadow banking system".])

    Either way, I’d probably suggest people stay out of the way of that train (and don’t short treasuries).. unless they just want some excitement..

  28. dead hobo says:

    Doug Kass’ Predictions for 2010

    By editor|Dec 28, 2009, 12:35 PM|Author’s Website

    Hedge fund manager and financial columnist Doug Kass shares in this CNBC interview his 20 possible outlying events for the coming year.

    According to Kass:

    1. Corporate profits soar 100% in the first quarter of 2010 from a year ago, while GDP jumps 4.5%.

    (nope on the first and yawn on the 2nd … no context … GDP up due to great job or fun with numbers)

    2. Housing and jobs fail to revive. (lots of people were saying this)

    3. The U.S. dollar explodes higher. (only when euro crashes)

    4. The price of gold topples. (not yet)

    “Gold is going to break $900,” he said. “It’s one of the most crowded trades.” (huh?)

    5. Central banks tighten earlier than expected. (Where?)

    “We might see a policy mistake, everyone’s concerned about it,” Kass said. “I think we’ll follow China. China’s already trying to stem the property speculation…So one of the surprises will be a much earlier increase in the Fed funds rates than generally expected”. (hahaha)

    6. A Middle East peace is upended due to an attack by Israel on Iran. (we still have 2 days)

    7. Stocks drop by 10% in the first half of next year. (10% is a hiccup … that’s like saying it will rain in April)

    “If we look at the consensus forecast, [stocks] are really clustered in a narrow range,” said Kass. “We get a decline and the first surprise is that corporate profits double in the first quarter and then you have an exogenous event, which hurts the market and then we get nothing for the second half of the year.” (Translation: the market will fall in H2 if something bad happens … Genius!!)

    7. Kass predicts that Goldman Sachs (GS) goes private. (Not yet)

    9. Second-half 2010 GDP growth turns flat. (BB was also saying similar stuff)

    10. Rate-sensitive stocks outperform; metals underperform…. (bla bla bla)

    This looks like garden variety blather to me, not expert.

  29. David Portillo says:

    I am on the side that thinks there is a bubble in treasuries. If the economy does well, fear will disappear and yields will rise (prices will go down). If the economy continues to be sluggish, the Fed will print more money that eventually will drive inflation up and consequently yields up as well.

    Shorting US treasuries is about the most certain opportunity I see right now, 10 and 30 yr especially. I don´t know if the market will correct in 1 month, 1 year or more, but yields have eventually to go up.

  30. Detroit Dan says:

    This is getting into “birther” territory. Rosenberg shoots down (with ease) the WSJ op-ed by the two Jeremies:

    Yet in this whole discussion of the bond market, nowhere do the “Two Jeremies” talk about their forecasts on the Fed and on inflation. These are the two most vital components of interest rate determination and they are not even discussed in this “bond bubble” piece.

  31. Gatsby says:

    Felix Salmon at Reuters takes a clear shot at the 2 Jeremys and a bit of a shot a Barry.

  32. Paul B says:

    Regarding Rosenberg, Siegel and stocks and bonds, the relative dearth of dollars vs. claims for them (35:1) means that default-free and creditworthy fixed future cash flows (Treasuries and High-Grade bonds) can satisfy the fiduciary need to match liabilities (hence, the bond bid) while investors are also coming to the conclusion that shares in many multinationals (non-cyclicals specifically) are actually a form of a more stable currency than dollars. JNJ equity can’t be a better credit than US Treasuries in nominal terms because JNJ can’t print money but it most certainly can in real terms because by owning something of value (like a pallet of band aids) a JNJ shareholder could effectively barter his shares for needs (like food and warmth) or wants (like a Porsche). The numeraire on the medium of exchange (USDs, JNJ shares, Long Treasuries) is secondary in real terms because sustainable value is driven by supply/demand and preference (1 pallet of band aids for a barrel of oil and 100 pallets for a Porsche would be expressed differently in Yen or USDs).

    There simply isn’t enough base money currently to first to service debt and then to provide nominal return to stockholders. This implies the need to make more money if stocks are to rise (they could theoretically trade at 1x earnings or even at a discount if no more money is manufactured). If no more money is made, then the real value of bonds vs. stocks will widen because at least bonds define a definite payment schedule. While JNJ can’t be a better credit than USTs, JNJ stock can be more “creditworthy” than JNJ debt in the sense that it’s a claim on real assets/production. JNJ debt is a claim ONLY on USDs as are USTs. In the event of a major currency devaluation, you can bet your bippy that JNJ equity offers a real return substantially in excess of its debt.

  33. Mike C says:

    Shorting US treasuries is about the most certain opportunity I see right now, 10 and 30 yr especially. I don´t know if the market will correct in 1 month, 1 year or more, but yields have eventually to go up.

    Eventually can be a really, really, really long time. Many people were certain JGBs were the most certain shorting opportunity for the last 15 years. Now that ship might finally be sailing (see Kyle Bass interview and point about demographic shift) but you’d have gotten killed maintaining a short position for the last 10+ years waiting for eventually.

    I have no idea how you can be so certain. Question for you. Have you read and watched Hendry? Read Rosenberg? Van Hoisington? The notes that outline the similarity between Japan and the U.S. Have you read Koo? My guess is if you are that certain, then you really haven’t studied the deflationist argument very closely. I was certain about the tech stock bubble and the home price bubble. This one isn’t clear IMO at all.

  34. Mike in Nola says:

    Here’s an interesting little tidbit I ran across at ZH. You can probably guess what the charts reflect.

  35. philipat says:

    The Bond market usually gets it right. It’s projecting a double dip recession (Or an extension of the existing recession) and deflation.

    I would suggest that it is the Equity market (The Bond market’s stupid little brother) that has it wrong. As El-Erian pits it, in times like these, the return OF your capital is more important than the return ON your capital.

    For anyone in Treasuries this year, returns to date are above 20%. Equities anyone?

  36. jeg3 says:

    (Stock, Housing, Gold, etc.) Bubble = Ruled by Greed until it explodes with lots of Collateral Damage.

    (Bond) Pseudo-Bubble = Ruled by Fear until it subsides and better investments develop, generally the worst case is slip and fall financial-accidents.

  37. A bull market in pessimism

    A lot has to go wrong to justify today’s rock-bottom bond yields

    WHEN Japan slid into deflation in the mid-1990s bond investors were caught unawares. As late as 1995 yields on government bonds, a haven in times of deflation, were still approaching 5%. Investors today are not about to repeat that mistake. Inflation may be positive in America, Britain and Germany, but in all three countries government-bond yields have plunged to lows exceeded in recent times only by levels during the 2008 panic.

    Since falling yields raise the value of bond principal, that has delivered bumper returns to investors. Government bonds have returned about 8% this year in local-currency terms in these three countries, according to Barclays Capital, outpacing equity returns. (Investors in weaker sovereign credits, such as Greece, have fared far worse). As go returns, so go investors. American equity mutual funds have seen net outflows this year of $7 billion, according to the Investment Company Institute, a trade group. Bond funds have had inflows of $191 billion.

  38. [...] been about whether or not its a bubble. This has come up quite a bit in conversation lately (see this and this), and have been fascinated by the different ways people have described the [...]