Over the past few months, I have been saying US Treasuries remind me of the dot com stocks circa 1997-98 in three ways:

1) You knew momentum was taking them (much) higher;
2) You knew it was going to end badly;
3) If you were honest, you admitted you had precisely zero idea when the day of reckoning would be.

I mentioned this at the Agora conference last month, and again on Fast Money last night and Bloomberg radio this morning.

What made the dot com situation so pernicious was that anyone who was judged on relative performance (i.e., Mutual fund managers), were all but forced into these names in order to keep up. Very few people — Buffett and Grantham come to mind — manged to both avoid both chasing these names and losing their client base.

Tobias Levkovich, Citigroup’s chief U.S. equity strategist, mentions something quite similar in the Bloomberg Chart of Day:


Chart courtesy of Bloomberg


Here is Dave Wilson:

“U.S. bonds may be just as vulnerable to a plunge as stocks were a decade ago, when the Internet bubble burst, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist.

The CHART OF THE DAY depicts how an index of monthly returns on 10-year Treasury notes since 2000, as compiled by Ryan Labs, compares with a total-return version of the Standard & Poor’s 500 Index from 1990 through 2005. The latter gauge peaked in August 2000 and tumbled 38 percent in the next two years.

About $561 billion has flowed into bond funds since the beginning of last year, according to data from the Investment Company Institute. Stock funds, by contrast, had a $42 billion outflow during the period.”


U.S. Bonds Resemble Internet Bubble, Citi Says:
David Wilson
Bloomberg, 2010-08-17 13:02:46.389 GMT

Category: Contrary Indicators, Fixed Income/Interest Rates, Psychology, Technology

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.

81 Responses to “Do US Bonds Resemble Dot Com Stocks?”

  1. Some discussion of it in the first couple of minutes of this clip. Kaminsky makes the case, which I’m not ready to dismiss out of hand, for a secular shift, and that the bond buyers are not in it for a trade.


  2. dead hobo says:

    It’s going to be a sad story when this one bursts.

    What interests me most is the aftermath. People think govt bonds are safe in all respects while, in fact, they only guarantee payment of interest and principal. Capital gains and losses are not a part of the picture. Losses, realized or paper based, will be massive. Deflation and double dip … here they come while wealth and spending go away. This one will be really bad.

    Pity the poor whipsawed investor. Nothing will look safe. Big losses in stocks in 2000 and 2008. Big losses in bonds soon.Real estate is the last big sucker play. Stocks to remain unsafe until Fed meddling in asset prices ends.

    What will be the next sucker play? Anyone?? I am sure that real investment that creates jobs won’t be a part. Fed meddling goes after asset prices, not real investment. Start-ups and lending to main street won’t be a part of any Fed activity, if history and current activity remain constant.

    Literally, cash in a coffee can under the bed is the safest alternative at this time.

    Glad you finally caught on. I saw this one coming months ago, as did many others.

  3. obsvr-1 says:

    Definitely a bubble and the chart shows a troubling similarity — there will be losses, the magnitude is yet to be determine when the bond bubble deflates (not bursts), but different from the dot com burst because many of the companies had equity valuations based on hot air so the loss in principle investment much higher.

    Where is the next bubble ? Once the herd gets their @ss handed to them in bonds they may make a rush to gold to drive it to bubblicous levels.

  4. RC says:

    The secular shift argument sounds so much like “new economy” talk that we heard in 1998-99 upto the point the bubble burst.
    IBM selling notes at yield half that of the stock yield. Isnt that a sign of a bubble !!!

  5. NoKidding says:

    I don’t do bonds, don’t know the correct jargon or the transaction mechanisms.

    If I wanted to tear off the warning labels and blow through a stop sign, how would I get myself into a leveraged short on bonds with limitted duration risk? Are there 2-year LEAPS of bond puts? Are they tradable by ticker?

    I’m thinking about converting my kamikazi equity short position into a kamikazi bond short position about 2 months after it (goodnes I hope) comes through for me.

  6. foosion says:

    Assuming you keep average maturity and duration at a reasonable level (the aggregate bond mkt, for example), how much are you going to lose when rates rise?

    Compare losses if PE or PE10 (using 10 year avg E) reverts to its mean sometime soon.

    Cash in a coffee can is always the safest alternative (actually either very short TIPS or TIPS matched to your horizon). Its returns are somewhat limited.

    I’ve been hearing rates will soon go back up for at least 10-20 years. One day it might actually happen.

  7. Gatsby says:

    This is an interesting comparison and an interesting question. Dead Hobo makes some excellent points.

    However we can’t bridge too much of a correlation between the two run-ups. The dot-com equity rally was a typical “tulip-type” hysteria boom. Information, logic, fundamentals were ignored and animal spirits took over.

    The pressure that fund managers were under is a GREAT point to raise (although apparently very few of them had heard of a stop-loss order). The question is, are we looking at the same thing happening to bonds?

    The case for a secular change, I believe, does have some basis. Retail investors are a lot older and looking for more stable sources of income (or simply wealth retention).

    The last 10 years have not done much to create confidence in equities for investors, and a secular shift to bonds could simply be a reflex action as part of an equities hang-over.

    We are facing a very deflationary (or minimally inflationary) outlook, which is a good place for bond holders.

    In the short-term we have had an 80% rebound that has put Wall Street ahead of Main Street.

    David Rosenberg is another guy who has made some eloquent arguments for a secular shift to income.

    As an aside, I don’t usually give much credence to an outlook on binds provided by the Chief Equity Strategist of Citi (maybe that’s just me).

    At the end of the day though I am a strong believer in mean reversion. I suppose the question would remain, from a long-term perspective, where dies the mean lie?

  8. Joe Retail says:

    The one who will get seriously hurt is the little guy who has been told that “fixed income” is safer because it’s government guaranteed and it offers — fixed income. Seem obvious.

    What no one has told him is that a “fixed income” fund managed by an active manager can be just as volatile and just as risky as any equity fund.

    So, what happens when all of the little guys who have been scared out of equity and into bond funds and similar (you’ve got to go somewhere …) learn this one the hard way?

  9. Dazydee says:

    I cry foul, the scales don’t match: Intentionally isleading chart.

  10. aiadvisors says:

    Treasuries = dotcoms? I don’t think so. Dotcoms were pure speculation on massive profits (which would not and could not materialize) years into the future. Treasuries can and always will repay the principle amount together with the coupon interest at the designated times. There is no risk in that. The only risk to Treasuries is inflation which ain’t gonna happen anytime soon. Inflation requires money creation which requires lending and borrowing which also ain’t gonna happen in this age of deleveraging. Money supply is contracting as loans default and get paid off. Also lenders don’t want to lend due to risks of default and borrowers just don’t want to be in debt anymore. Can anyone spell liquidity trap? End of story. Treasuries remain as safe as ever albeit with lower interest income.


    BR: I am not saying they are = ; I am saying there are similar feels to the end run as $ pours into the asset class . . .

  11. call me ahab says:

    Two Wall Street tycoons that ended up with “pockets full of money” after the Crash were Alfred Lee Loomis and his partner and brother-in-law Landon Thorne. The two had been leading financiers for the new electric power industry in the 1920s. Loomis was also a scientist, and he became a major supporter of some of the century’s greatest scientific minds at his Tuxedo Park home. By early 1929, the two partners had liquidated all their stock holdings and put the gains into long-term Treasury bonds and cash. The reaction by their peers, so many of them forced out of business, seemed more like envy than admiration since “in the midst of so much despair, with the economic situation deteriorating day after day, Loomis and Thorne continued to profit handsomely


    the prime corporate bond yield average went from 4.59% in September 1929 to 3.99% in May of 1931. By June of 1938 the average corporate bond yield fell to a new low of 2.94%. Bonds returned 6.04% during the 1930s.

    9 years- has it been 9 years?

    so . . uh . . .why are treasuries going to bust?

  12. Jeremy Seigel and Schartz did an op-ed in today’s Wall Street Journal (subscriber content) that concluded something similar–bonds are way overvalued, i.e., interest rates are way too low.

    My take is that maybe the valuations they propose (1% interest on a four-year Treasury equating to an earnings multiple of 100) are too high because other investment alternatives are expected to decline in value. If housing is an alternative to Treasuries, then a 10% decline in housing prices over the four years would push the real yield to 11%. In other words, money doing nothing would return 10%, vis a vis housing. The extra 1% is on a Treasury bond is not the only metric to consider. Yields should go down if prices for alternative assets are expected to decline. It is that bugaboo “deflation”, though that is not often the manner in which the term is usually employed.


    BR: Ugh, I don’t like being on the same side of a trade as Siegel

  13. aiadvisors says:

    Furthermore, the yeild curve is distorted by a single massive buyer, the Fed, not mass investor hysteria. End of story chapter 2.


    BR: Agreed

  14. boola2 says:

    Dazydee is right that the chart is misleading. The chart appears to show that the S&P500 was up somewhere around 7x in 10 years, while the Treasuries have a little more than doubled in an equivalent span. Events of very different magnitudes. By using different scales and not starting the axes at zero, you can make any two upward sloping lines look similar. Not saying Treasuries aren’t very overpriced, just that this chart doesn’t show a dot com-like bubble.

  15. Joe Retail says:

    aiadvisors: I agree, and you offer a clarification to my previous comment.

    Direct purchase of treasuries, etc. gets you a known quantity. My own retirement fund includes a fair number of strip bonds, which will be held to maturity (haven’t bought much lately because I don’t like the current market). The difference is when people buy mutual funds thinking that it’s the same thing as buying the underlying bonds or treasuries. Then they are unwittingly open to damage at the hands of a too-clever money manager.

  16. call me ahab says:

    and another thought-

    a 2.5% yield in a deflating economy- mayby it’s not too shabby-

    of course- I guess you could put all your faith and hope in the stock market- if you like the idea of being gamed

  17. foosion says:

    Seigel touting stocks. High credibility there

  18. CowboyTrading says:

    BR – Would love to hear your opinion on Kyle Bass’s outlook for equities and markets in general. If you can start a thread on it I think a lot of folks would love to opine as well since it’s turned into a hot forward today across Bloombergs. Thanks!



    BR: See this

  19. X on the MTA says:

    For what it’s worth, I don’t think there is so much a bond bubble as there is a system awash in liquidity that has to go somewhere. Some money is chasing momentum, some is chasing income, some is chasing yield that has more stability than equities can provide. I do think rates are absurdly low, but that’s what happens in deflationary environments. The JGB bubble has been a “no-brainer” short for 15 years, but that trade has been a consistent loser for just as long. 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.

  20. IS_LM says:

    Macroeconomist, economic historian, and former Treasury official, Brad DeLong, oblierates this moronic idea (as well as the WSJ op-ed by Seigel et al.). He does so on the basis of fact and reason. (For his thorough discussion of the current state of the economy, see this.) This blog post is serious fail, right down to the deceptive chart.


    BR: Sold to you . . .

  21. Evoo Kermartin says:

    One man’s “change in investment strategy” is another man’s “scared shitless flight to safety.”

    How come nobody ever thinks to start welding a whole in the hull of the ship at the start of the Poseidon Adventure. I mean, after you’ve seen the movie enough times shouldn’t you just stay in the engine room with a blow torch and wait for the ol’ gal to roll?

  22. tradeking13 says:

    Everyone is so focused on nominal yields. Inflation is currently around 1% which equates to a 1.5% real yield. If inflation were 3.5% and the 10-year were at 5%, it would be the same real yield, but no one would be calling it a bubble. Also, if we do dip into outright deflation, a 2.5% yield will look pretty good. Just ask the Japanese.

  23. [...] FusionIQ CEO Barry Ritholtz makes the argument that US bonds are resembling tech stocks during the dot-com bubble. “What made the dot-com [...]

  24. IdiotInvestor2 says:


    This is one of those rare instances where you could be totally wrong. I am personally not in treasuries or any bonds, because of the limited upside, not because I believe it to be a bubble.

    Aren’t the gold and bond rallies the “most hated” rallies for equity bulls ? Maybe the gold market and bond market is right.

    At 0% Fed Funds rate, and a specter of deflation and recession, why is guaranteed 2% rate so bad ? I know people in bond funds will lose the NAV, but if someone actually holds bomds to maturity, the only cost is the opportunity cost as US will return principal. So the risk being taken by bond holders is nothing compared to risk taken by dot com chasers.

    At some point – yes – eventually rates will have to rise. The economic indicators, Fed rates etc will signal that. For a gradual recovery – as what most bulls claim – the rates will not have rise fast. So just because something goes up in price, doesn’t mean it’s a bubble.


    BR: Rare? Totally wrong? You are wildly optimistic.

  25. Ricardo Arroja says:

    Very interesting indeed. It makes me wonder what final outcome in the inflation vs deflation debate will emerge.

    Just recently, while on vacations, I had the opportunity to read “The Ascent of Money” by Niall Ferguson and I was struck by his comments on inflation vs deflation. His argument goes as follows: if governments inflate a way out of the crisis they’ll strike pension beneficiaries in order to bail out debtors, however if on the other hand austerity really kicks in then it would be the other way around. I’m very doubtful. The US is trying very hard to inflate this crisis…which given its own twin deficits is like putting out a fire with gas. On the contrary, in Europe, where I’m based, assuming the euro is here to stay, we are in for several years of Japanese-like deflation. However, how do we conciliate these pollarized views on the two leading economic regions in the world?? We don’t! Something has to give.

    In theory, I would say: worldwide deflation is just around the corner. Not only are budget deficits unsustainable, but also the Western world’s demographics (especially in Europe) do not allow for any kind of pension devaluations. In practice, as a professional trader myself, I look at the rally in 10 Yr Bonds and German Bunds and its scares the hell out of me! I agree: it feels like the tech bubble. I won’t touch them – either long or short. The same happens with the yen, which perhaps is a subject that Barry could dwelve on in the coming weeks…

  26. hammerandtong2001 says:

    Interest rates must rise for the so-called bond bubble to pop.

    How are interest rates going up from here?


  27. Mike C says:

    Excerpt from something I posted elsewhere:

    Usually I agree with Barry, but in this case I think both Barry and Tobias Lefkovich (cited in the note) have it wrong.

    Was listening to Louise Yamada the other day (worth listening to IMO):


    She reiterated her point that I’ve heard her make several times the past few years which is that secular lows in interest rates do NOT make V bottoms (or bond prices do NOT make V tops). There will be no crash in bond prices similar to crash in Internet stocks. She points out interest rates usually go through a multi-year bottoming process before beginning the next upcycle gradually. This is out it played out in the 1930s/40s.

    I think most people continue to underestimate the long-term deflationary impact of the secular deleveraging/credit contraction that will last years. Go back and read Rosenberg the last few weeks.

  28. MorticiaA says:

    I don’t buy this.

    1. Interest rates — as hammerandtong2001 @ 1:59 says — have to go up to burst a bond bubble. I truly don’t see that happening anytime soon.
    2. M2 is growing, but at a snail’s pace; this tells me we’re headed into deflation. Deflation means that my money is worth MORE when my Treasury matures than when I bought it. Maybe it’s not a screaming buy but it certainly rates a hold.
    3. Our deficit spending levels make me fear that eventually foreign investors will decide to dump US equities, again pushing investors to the quality flight.

    Call me simple-minded but that’s how I see it.

  29. yuan says:

    The axes on that graph are misleading. Any trend can be made to look like a bubble if its artificially stretched out. There is also a clear parabolic component to SPY from 1993ish to 1999 while the rate of increase in bonds is roughly linear.

  30. mrmike23 says:

    I have a question if someone would be so kind as to answer. Does the US Treasury set the interest rate that a certain cusip will have? Or does the price of the bond issue being bid upon by the dealers determine the interest rate?

  31. mrmike23:

    Market bids determine interest rates on Treasury bonds and notes.

  32. Just remember: Market bids also determined the price of Yahoo was $250 !

  33. Petey Wheatstraw says:

    If it’s fiat currency (whim-based, as it is) derived ”security,” and keeping in mind the incestuous relationship between the Fed and our Treasury, I wouldn’t doubt if everybody holding it, or holding claim to it (whatever form ‘it’ takes), gets punked before this shit is over.

  34. Stew says:

    Saw your note on Treasuries.

    I was asked to prepare an outline of the bullish case part of our process. (feel free to paraphrase).

    I have been long Treasuries since early April and am now slowly but surely edging to the exit.

  35. AHodge says:

    those of us short treasuries have a lot of splainin to do. Ouch!
    i flipped and went long at 2.95 yield. because.
    1 there is actually a shortage of fixed income to be bought. the securitized asset backed BS went awayand aint comin back…. yet. In spite of the Streets yearnings. it satisfied over half of “fixed income” in 2007
    2. A fed study found that QE1, the trillion $+ purchase, dropped long yields 50-75 bp. Completely plausible to me. The hint of this moving markets now
    3 so there may also be weak economy, new normal, permanent buyers per Kaminsky and others. But if it was mostly economy, the corp spreads would have widened.

    Kaminsky an m&A guy who hears stuff.
    in spite of his all purpose spokesplayer makeover, thats what you take from him.
    macro not so much, otherwise karen the najarian boys and Tim are some of the best tube viewing there is. fast money a quality show
    except the option shills for begining losers. that is a sellout

  36. James HPCP says:

    You never know what the American people are going to do, but they all do it at the same time, Tech/Telecom stocks, houses, now bonds.

  37. daniel k says:

    I agree with prior comments–not apples to apples. And it isn’t a question of sentiment.

    What happens depends on policymakers worldwide.

    Look, if the US and Europe would adapt a more counter-cyclical approach and a more thoughtful economic strategy for the globalized world, and if China and Germany would use this countercyclical stimulus to ween itself off of currency manipulation, hell yes these bonds would be overvalued.

    But then take another look at the last time the long bond broke the 4% yield floor. It wasn’t pretty.

    Barry has a pt with this post, but the treasuries are up for good reason: savers, Euro-escapers, oily types, and Asian vendor financiers all want a piece of 10 years at 2 something percent.

    Many see it as the Fed’s job to push them out these buyers into the world of risk; indeed, many see this as a solution. But we don’t have a capital shortage, we have a demand shortage. We need a massive jobs program, an end to currency screwing around if not exactly pegging and the Euro, and a strategy to help America and Europe find a way to employ its population at non-deflationary wages in sectors with long term prospects, one of which would not be construction.

    Boo to the Bill Gross plan. We need something more strategic and fair.

  38. Dennis the menace says:


    You wouldn’t be very long treasuries, would you?

    I would advise you to disclose that info, but your emotions already gave you away.

  39. [...] The Boss has been making the media rounds talking about the bond bubble story all week, on MSNBC and Fast [...]

  40. seana0325 says:

    Correct me if I am wrong, but Kyle Bass (he called the house top in ’07) believes this is a secular change and that rates will not be able to move up until the U.S restructures its debt. He also said that Japan will be the 1st to restructure based on there ponzi scheme bond market.

    What do you believe Barry?

    I honestly dont know b/c I dont have the skills nor the knowledge (Im in Biotech) to answer this important question.

  41. dead hobo says:

    Ive been thinking about this problem and I don’t think I analyzed it properly above.

    Let’s assume debt is priced properly. This means that all other assets are not priced properly. To put it differently, they are priced much too high in relation to debt. The price of debt is low because the demand for money is low and the demand for safety is high. Given that there is no strong demand for debt, borrowing, or lending beyond government borrowings, then the price of money has no likelihood of rising soon. If debt is required for investment, then there is no demand for investment, otherwise rates would be rising. This would mean growth is constrained to current capital assets, which implies a closed system of decreasing value. A system in decline could not be worth rising stock values, thus, stocks are grossly overpriced and must fall to match lowered prices of debt.

    Stocks and commodities are at current levels because the velocity of money with respect to financial assets (paper wealth) is much higher than the velocity of money with respect to real investment. In other words, trading systems are inflating the value of assets and creating an imbalance between the value of paper assets and the value of real assets.

    A cynic might think that the Fed has been attempting to keep assets propped in value with the hope that real values will rise to match inflated values and the world will resume as it was a couple of year ago. A realist would say that paper wealth is not wealth of any kind and the value of paper wealth must fall to the value of real wealth. The price of debt today may be approximating the value of real wealth at this time. Thus, the debt balloon will not explode. Rather, the price of paper assets will fall to much lower levels than today … possibly S&P 500 – once all assets re-balance properly.

    Asset values will fall significantly in this scenario. And this will be a necessary requirement for any substantial recovery in the real economy. Th demand for money for investments won’t rise until the price of assets is fair.

  42. dead hobo says:

    To put it differently, the stock market is a sucker bet at this time. The bottom has to fall out at some time. Nobody knows when, but lowered daily volumes are a clue. A long time ago I learned that volume precedes price. If HFT volumes are in decline now in addition to real volumes, then the fall will be sooner than later. So will commodities because of massive pricing distortions due to hoarding and trading systems. Debt isn’t in a bubble, it’s the equivalent of the coffee can under the bed. Cash won’t move out of debt until after stocks and commodities fall a whole lot. The low price of debt is another way of saying the equities prices are a fantasy and the SEC is a failure. A competent SEC is a prerequisite for a growing economy.

  43. IdiotInvestor2 says:


    Weren’t you on Fast Money last week (or just before that) arguing against Tim Saymour and Karen ? IIRC, you were arguing that we are in a deflation (or disinflation) but not inflation. So why are you now thinking bonds are in a bubble ? Deflation indicates lower yields – so aren’t you contradicting yourself ?

  44. stantam says:

    Is everyone overlooking the fact that the public is now underwriting the massive US deficits, not unlike the Japanese public doing so for the last generation in that country. Makes sense to me. Not much different than getting bearish on Yen bond 15 years ago, i.e. dumb move. Don’t be so anxious to call a turn here. It could be painful. The eventual turn could take a while … QUITE a while. It’s a natural part of the process of what is happening right now. KISS principle applies!

  45. george matkov says:

    Barry, I’m a big fan because you have tended to be right but I disagree with you on this. People and institutions are in bonds because they think equities are way overpriced considering the risk out there.

    For what my strictly amateur opinion is worth, I think the bond markets are anticipating an imminent collapse of the Japanese economy, followed soon thereafter, by a collapse in China. There’s also the little matter of the Koreas.

    Keep up the good work.

  46. radicall says:

    Hey NoKidding, if you want to short bonds, first figure out which length you want to go to 10 year or 30 year. Your risks and rewards can be higher the further out you go in terms of time.

    You can use ETFs to play this (Short TLT or buy puts, or long TBT/ TMV which are leveraged). Be careful as with any leveraged ETF if you do decide to go that route. They are only good for a trade and not as a long term holding.

    You can also use mutual funds like RRPIX and RTPIX to short bonds.

  47. bmoseley says:

    Barry, ideas on which types of bonds are at most risk? i’m inclined to think junk?

  48. cognos says:

    Oh, some of these comments are rich! (by which I mean poor)

    Somehow – “money in coffee (at 0%) can is better than bonds at 1/10 of 1%” – Really? Do math much?

    Somehow – “this must be telling us equities are too high” – Really? 10-yr bonds were at 2% in early 09.

    Low bond rates are accompanied by very low credit spreads even on high yield debt and mortgage credit. These financing rates tend to be high quality positive indicators for risk assets ( equities)

  49. cognos says:

    There are some good reasons for the extra vol in long rates.

    It’s actually a very small, supply constrained market.

    It’s driven by mortgage portfolio hedging, as rates come down giant MBA portfolios lose duration (refi increase) and those holder are forced to cover UST shorts in a non-economic way. Very productive trade if you understand the dynamic.

    The massive change in the refi universe should have lots of positive economic benefits – home owners, buyers/prices, and banks who make money processing.

  50. BR,

    you lead (again) the Meme of ~”The 30-yr trading like pets.com” ?

    That’s FFabulous~!

    (if all the Hacks, that have have levered your thought-stream, Paid you Royalties…..)

    More, to your Credit, that Proves that You are One of the rare Ones.

    ref. E Pluribus Unum. ( to my Mind, the Best that We can Be.)

  51. SecondLook says:

    If there is a Black Swan event that is being overlooked by most investors, it very well may be a permanent in global oil production; i.e. Peaking Oil.

    That is likely to produce an event that modern society hasn’t seen for some hundreds of years: Persistent cost inflation due to an increasingly scarce critical resource. With the additional consequence of hobbling economic growth – the Mother of all stagflation scenarios.

    It’s pretty much a given occurrence; oil after all is a finite resource. The only question is timing, and increasingly, it’s looking much sooner than later.

    One sobering example of what is to come (from the EIA):

    Forecasts that Mexico could become a net oil importer by 2015, with net imports reaching 1.3 million bbl/d by 2035. As one of the largest oil exporters to the United States, this has important implications for future U.S. energy supplies. From Mexico’s perspective, changing into a net oil importer would have important repercussions on the overall economy, due to the dependence of the federal government on Pemex for a sizable share of its revenues.

    Mexico is one of the three top oil exporters to the United States…

  52. SecondLook says:

    Sigh I really should remember how to html code properly.

  53. 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, it is the return OF your capital which is more important than the return ON your capital.

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

  54. Mike in Nola says:

    No comparison between dotcom stocks and treasuries. One had no income stream and a hope of appreciation; the other has a known income stream with appreciation being gravy. Much of this bond bubble hysteria is being promoted by stock salesmen who are dying because Joe retail doesn’t want to play in the casino. I certainly believe anything Jeremy “stocks for the long run” Siegel says; he’s been so right all along.

    The same salesmen are pushing dividend paying stocks. The trouble with them is that dividends aren’t guaranteed if things get worse. Even solid consumer staples companies like Lever Bros. and Clorox are complaining of margin squeezes because shoppers are much pickier than they used to be and the companies cannot pass on cost increases. This can lead to a drop in stock price and to a cut in dividend. Both negatives.

    Anyone see this video? http://www.cnbc.com/id/15840232/?video=1569156964&play=1
    Surprisingly, Larry’s octobox shoots down Seigel. Even the bond vigilante Santelli doesn’t buy the theory. Creszenzi is talking his book, but he calmly lays out why it’s not a bubble.

    Yields have dropped faster than they otherwise would have because the hedgies are piling in, but that does not mean they wouldn’t have gotten there eventually. Yields may bounce around some because the prop desks are playing games like they always do, although some got burned last week because their 10/30 spreads were killed when the Fed unexpectedly announced it was buying long bonds, too.

    OTOH, there’s no reason for yields to shoot back up soon based on fundamentals. In a depression or deep recession inflation goes down, bond rates go lower and prices go higher. In deflation, this is more pronounced as an income stream is worth more. Simple math.

    Yeah, yields will rise eventually, but if you bought a 5 year at 4% it doesn’t matter to you if you can hold it to maturity. As for longer maturities, I think we’ve all learned you don’t buy and hold. I got my 10′s and 30′s at a much better yield than today’s and they are a good investment for the present.

    There is probably a bubble in high yields because a lot of people piled into them, chasing yields from companies that may not be able to pay back principal, guaranteed repayment of principal being a large part of the attraction of a bond. If one of the big high yield bonds defaults, the spread to treasuries will shoot up and cause some losses.

  55. Mike in Nola says:

    BTW, anyone see the Spiegel Online article about Greece?

    Entering a Death Spiral?
    Tensions Rise in Greece as Austerity Measures Backfire

    If even part of what’s in the article pans out, you’re gonna see the 10 year below 2% and the dollar much higher.

  56. Detroit Dan says:

    This, comparing the dot com bubble to the current market for U.S. bonds, is the single stupidest idea I’ve ever read. No offense to Barry. I still love the blog.

    And who knows, I could be the stupid one…

  57. Detroit Dan says:

    Seriously, the only risk to US bonds is inflation, and how likely is that with double-digit unemployment? Ditto for Japan (although at least their UE isn’t as high as ours)…

  58. IS_LM says:


    You wouldn’t be very long treasuries, would you?

    I would advise you to disclose that info, but your emotions already gave you away.

    I haven’t expressed any emotions. I’ve just pointed you to a reasoned analysis based on ECON 101 standards. Your mileage may vary.

  59. Mike in Nola says:

    A note on bond funds and why they aren’t really a good substitute for individual bonds. You have trouble locking in yields.

    Back when Muni yields were worth something and were safe, we had some intermediate term muni bond funds. They were supposed to have an average of about 7 year duration. The problem was that the managers kept trading bonds to keep that duration. So, as yields fell, instead of keeping the original yield we anticipated, those bonds were replaced by lower-yielding, newer bonds and we got a capital gains instead of tax free income.

    I suppose something similar will happen with many bond funds that claim a certain duration. So, if you want bonds, by bonds to control your own holdings.

    A few funds that seem to be immune to this problem are American Century target date funds: BTTNX, BTTRX and BTTNX. The contain bonds maturing in a certain year and there is no need for the managers to trade bonds. The costs are better than most funds, being about .5%. There may be some similar lower cost ETF’s, but my wife’s 403b doesn’t allow buying ETF’s because the brokers can’t get a kickback, so those were the best solution.

  60. RW says:

    Do US Bonds Resemble Dot Com Stocks?

    Money flow into US bonds is comparable to equity momentum investing? Bet on that relationship and I’ll eat your lunch right off your own table and there won’t be a thing you can do about it except yelp, “thank you sir, can I please have another!”

    Some questions appear to possess face validity because they appeal to some moral issue but are otherwise utterly ridiculous; this is one of them.

  61. Detroit Dan says:

    I agree RW.

    We live in unusually uncertain economic times, with inflation rates nearing zero. Buying US bonds is the equivalent of stuffing money in your mattress, only safer. Comparing this to the dot com bubble makes no sense…

  62. VennData says:

    The people who got creamed in the equity crash and housing crash of ’08 missed the ’09 mother of all rallies.

    They have to believe they were right, so they want the equity market to drop (mirrors the polls reflection of the irrational hatred for Obama – who’s doing exactly what he promised save cap and trade.)

    In the mean time they have put their money into bond funds in record relation to equity funds. Why? cash yield’s zero, oh …and bonds “went up” in the last ten years.

    Sometimes the bond market is right, usually the bond market is right, but the above Americans are never right. Sell your bonds.

    P.S. the Brad DeLong article mentioned above is the poorest thing I think he’s ever penned, utter sophistry.

  63. Mike in Nola says:

    Venn: my bonds have made about 10-15% this year. How has the S&P done year to date?

    BTW, didn’t get creamed in 07-08 or the housing crash. Preservation of capital is most important to me. Did miss the most recent stock bubble because it had much more of a bubble quality to it than the bond market does: based on hype and the hope of a recovery, and a very strong one at that. Could see that those bases did not exist. Some, like BR made money and deserve props for having the balls to do it, but some of us chickens do invest on fundamentals.

  64. neutrinoman says:

    But the bond market did get it wrong, in mortgages, big time. Such problems are not captured by looking at interest rates alone. A whole category of bonds (or bond-backed assets) fell apart, leaving investors with the thought that they should pile into more secure-seeming bonds. The idea that the bond market is infallible here, while stocks are highly overvalued, is a truly bizarre thought that does remind me strongly of the “new era” thinking that typically feeds bubbles. People, we’re living through a *credit* crisis, not an equity crisis. If investors think that the economy is going to tank, why are they also buying corporate bonds and driving down their yields? Buy some quality dividend stocks instead and get a higher income.

    The bigger problem with this whole discussion is that it ignores who’s actually buying Treasuries. Mostly, it’s central banks and sovereign wealth funds. It has the strong whiff of a Fed- and Treasury-engineered bubble. There’s something that Those in Charge are not telling us.


    Why would individual and institutional investors pile into a short-term investment that gets them almost nothing? If they’re going for some yield (say, 20- or 30-year bonds), but have a shorter time horizon than that, then Treasuries are vulnerable to a sharp sell-off. People are treating bonds like a MM fund, which they’re not, unless you buy the bond itself and hold it to maturity. But then it’s not a MM fund either, because you have no discretionary access to your principal.

    This will not end well.

  65. 777george says:

    Wish the present day bond situation WAS like the dot.com blowout. My brother and I killed a number of issues. The best was buying Dr. Koop’s eponymous dot com stock at $4 3/8, then holding my breath while shares blew thru $50, then with heart beating wildly calling in the sell order(I cried while it went up into the ionosphere, but chortled with glee as people lost everything!). Some others were almost as good-my brother and I are vicious cynics.

    Nowdays, having lost A LOT, I hide in my closet and pray for the scent of another dot.com bubble.

    PS Even my cynicism was unprepared for the scope, depth and corruption of this downturn. Well, they (some pundits) say that the 21st century will belong to China. Heck, I am buying HK real estate RIGHT NOW. Contact me if you are intrested in making a new fortune! Boy do I have a deal for you.

  66. 777george says:

    Forgot. The treasury situation DOES resemble the dot.coms. As an independent entity, or entities including the Fed, they can break any law made since they have NO transparency. I would rather an old Maxwell House can or simple equity ownership as solutions. They are preferable to trusting Geithner and Bernanke with everything and assuming the future is assured with Treasuries. Who says they couldn’t decide to delay interest payments??? Put a hold on sellers???(Hedge funds did it)

    If you love and trust this current US fiscal leadership, but Treasuries. I don’t and won’t.

  67. Broken says:

    Bonds don’t bubble like stocks. If they don’t default, you get par value back when they mature, even if their market value drops in the meantime. The worst you can lose is liquidity.

    The exception is inflation, the real bond killer.

    I am 60% bonds and I am starting to short treasuries (TLT and TLH) as a hedge.

    As I said a few weeks ago, equities are promising. Simply because the alternatives are so limited.

  68. Captain Jack says:

    My superfluous, off-the-cuff and unedited-for-typos two cents:

    The comparison of USTs and dot com stocks is not a good one. It just doesn’t smell right.

    Are treasurys showing signs of of being overbought? Are they showing signs of a bubble? Sure. There is a case to be made for that. But the situational context of the big bond rally is so, SO different from the dot com boom, it almost feels like the comparison hurts more than helps.

    Consider, for one, that treasury bonds have more or less been in a multi-decade bull market since the Volcker inflation intervention circa 1980. Or look at the yield on the 10 year, which was at 8% in 1994. It has been declining for sixteen years!

    So the first reason I don’t like the comparo is, the bond bull market is a big, BIG phenomenon — a multi-decade phenomenon, one that makes the dotcom bull look parochial in comparison. As Hugh Hendry (a deflationary bond bull) has noted, moves that last for decades tend to go out in spectacular fashion. And as David Rosenberg has noted, there is still lots of room — lots and lots of room — on U.S. private sector balance sheets to absorb more USTs.

    Another reason the comparison feels weak is because, when one talks about USTs being in a bubble, one is not talking about a single overbid asset class. One is indirectly opining on the future outlook of the entire global economy. USTs act as “last resort safe haven to the world” in the event of broad-based deflation (or disinflation) and global economic slowdown.

    So when we ask the question “are bonds in a bubble,” we really have to ask, “in comparison to what.” We also have to ask who is buying and why, and the motivations here seem very different than they were in bidding up Yahoo at two hundred times earnings.

    Another problem: The dot com bubble was utter lunacy and everyone knew it. The arguments based off “eyeballs,” the idea that burn rates were cool and profitability was passe — all that stuff was pure insanity. Dot com stocks were a Wall Street cocaine high.

    But, in contrast, when you listen to the guys who are still bullish on USTs — guys like Hugh Hendry, Lacy Hunt, Gary Shilling, David Rosenberg last time I checked — those guys are NOT nuts. Their arguments are cogent… and frightening… and backed up by empirical evidence.

    Consider that, if America follows the Japanese experience, the 10-year yield could fall to 1%. (I noted this recently keying off the FT: http://mercenarytrader.com/2010/08/why-investors-should-be-terrified-of-deflation/)

    Consider also that, if the threat of a “liquidity trap” is real — and Paul McCulley of PIMCO has come out and said it is — then further efforts at Fed stimulus could be akin to “pushing on a string,” the reality of which could further fuel deflation expectations, which in turn could further create a self-fulfilling prophecy.

    Some, like JP Morgan and others, argue that the disconnect between bonds and stocks means equities are undervalued. But it could also run in the other direction. It could mean that the bond market is calling for global economic activity to hit an austerity wall.

    And then, too, I have to wonder about guys like Faber and Taleb. I love Marc Faber. I love Nassim Taleb. I catch their commentary whenever I can. But on the subject of USTs they run the risk of not just being dead wrong in terms of timing, but also being STRUCTURALLY wrong in terms of underestimating the potential power of a global liquidity trap and the degree of “flight to safety” action left if everything stalls. We could be looking at a philosophical comeuppance here on par with the one the Austrians got in Q209.

    Am I a bond bull? No. Do I have a substantial long bond position? No. I am neither short nor long USTs at this point. But I am fascinated by the debate because the debate over USTs is by extension a key aspect of the even larger debate over inflation vs deflation, and by further extension the near term fate of the global economy.

    All that to say is: Dot Coms This Ain’t. We’re after a much bigger beast here.

  69. Doug Kass says:

    For the first time since 1962, the dividend yield on the DJIA has eclipsed the yield on the U.S. 10-year note.

    A long term chart speaks volumes as to how deeply overvalued bonds are relative to stocks and/or how overvalued the fixed-income market is in an absolute sense.

    A flight to safety, the ramifications of the administration’s populist policy, the growing perception of a structural rise in U.S. unemployment, fears of a double-dip, concerns of deflation, the emergence of nontraditional (and intermediate-term) headwinds (e.g., fiscal imbalances, higher marginal tax rates, costly regulation, etc.) that will serve as a brake to domestic growth, an extension of zero-interest-rate monetary policy with more quantitative easing and the long tail of deleveraging (and reduced availability of credit) all help to explain the strength in the bond market and the precipitous drop in yields.

    Nevertheless, I view the great bull market in bonds to be approaching a speculative blow-off, and I am increasingly of the view that shorting the U.S. bond market will be the trade of the decade.

    Stay tuned.

  70. Captain Jack says:

    Also — PragCap swings a pretty heavy bat on this topic, well worth the read:


  71. [...] 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. [...]

  72. schnauser says:

    I get your point BR, but I think Grantham would beg to differ: I believe he lost 40% of his AUM during the final blow off of the dot com bubble.

  73. Mike in Nola says:


    If you are referring to securitized mortgages, they were not true bonds but synthetic products created by the same people who are now telling you treasuries are in a bubble. They were made popular because treasury yields were too low for institutions who were told that the synthetics were just as safe as treasuries by the banksters.

    Treasuries did not misbehave. If you look at a hart of TNX you will see that 10 year yields had a local peak in the summer of 2007, just before the stock market peak and then dropped like a rock over succeeding months, anticipating the collapse in equities for those who paid attention.

    Doug: The distinction is that DJ yields are not guaranteed and neither is principle.

    If things get worse, dividends could be cut. The big consumer staples seem to all be experiencing profit margin squeezes. Walmart’s same store sales declined last quarter. The tech giants are to a large extent dependent on business reinvestment and consumer buying of pc’s which is not going to continue if final sales slump.

    And then there’s the danger to principle. If rates suddenly jumped to 5% by next year, a 10 year bond holder would lose 20% principle if he had to sell prematurely. Such a loss in stocks is certainly not unusual, considering that the DJ is still almost 30% off it’s pre-crash highs. And, a 10 year bond holder simply sufferers a loss of liquidity if interest rates rise. He still gets whatever yield he bought at and gets his principal back.

    I know you aren’t a double dipper and you may be right, but many have a different risk profile and don’t want to get burned again. Kadrosky’s post makes some points on that issue.

  74. jabbos says:

    …well if Treasuries are in a bubble, EM’s are in a mega bubble.

    Having said that, in contrast with the DOT COM bubble circa 2000, this Treasury Bonds “bubble” is openly being promoted and blessed by the gov’t and the Fed (with what has now become known as the Ben Put) and as the saying goes: DONT FIGHT THE FED!!!

  75. [...] United States bonds resemble the dot-com stocks of the late [...]

  76. spirit in the sky says:

    okay fellas
    you have a bit of cash do you
    put in a bank?
    stash it under the bed?
    invest in stocks
    invest in paper gold and silver?
    invest in physical gold and silver?
    invest in other commodities?
    invest in property?
    invest in venture?
    or bonds?
    so we assume we know a little so basically we are talking wealth presevation here
    it all looks a bit dodgy at the moment especially bonds
    consider this
    record debt,high unemployment,falling tax revenue,heavy liabilities (about a thousand foreign bases plus wars and wars to come plus medicare plus unemployment social security, overseas aid, disaster care etc etc etc etc)
    mr bernanke at the non disclosed balance sheet HQ (an NGO) likes printing money
    its great ‘in god we trust’ and you need to because it is paper backed up by a promise nothing else and the more you print the more people distrust it hence the gold price hike even through the ‘alledged’ manipulation
    so what you have is an economy based on debt and inflation with the added irritance of human unemployment via the automation processes of industry and the leverage of the business efficient active rich ensures money gets sucked away from the average who just survive
    so lets go back to bonds
    you borrow more to stimulate growth, pay your social liabilities and fund the military presence plus the industrial military complex
    now all regions in the world are financially precarious and intrinsically interlinked but will they maybe soon want to buy US bonds? eg chinas offloading japan, uk and especially europe have big financial woes
    in fact that situation may have saved the dollar as they all devalue together
    so obviously the us rating agencies darent declare US bonds less than A+++ rating but what when soon no one want’s american debt except mr bernankes printing press
    will this fiat currency this promisery bit of paper go with it?
    bear in mind that when the romans debased the silver content in their currency it didn’t work out very well but then again you couldn’t eat it COULD YOU?

  77. [...] The Boss has been making the media rounds talking about the bond bubble story all week, on MSNBC and Fast [...]

  78. [...] 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 [...]

  79. [...] Previously: Do US Bonds Resemble Dot Com Stocks? (August 18th, [...]