Friday, November 23, 2012

Is there such a thing as a bond bubble?

There has been more talk about bond bubbles, but it truly is misplaced. Rates are low because governments and central banks want them low and the markets believe those policies and the effectiveness of the central bank to deliver on that promise. Part of the central bank promise is to push rates so low that market participants will seek higher yields in other asset classes. They have been effective at moving money to riskier assets and have pushed credit spreads down. The result on the other side of the equation is that borrowers are coming to market if they need cash and holding more cash if they have it.

Is this the signs of a bubble? It could be an exaggerated policy but no bubble. It is not irrational to follow the rates lower. However, like any momentum strategy this cannot last. rates will have to move higher. The reversal of policies and inflation is not a bubble but the natural course of events. 

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