What evidence is there for a bond market bubble?

There is a saying that even a blind squirrel occasionally finds a nut. I am left wondering about this as I note that the former Chair of the US Federal Reserve Alan Greenspan has posted a warning about bond markets. From Bloomberg.

Equity bears hunting for excess in the stock market might be better off worrying about bond prices, Alan Greenspan says. That’s where the actual bubble is, and when it pops, it’ll be bad for everyone.

Actually that is troubling on two counts. The simplest is the existence of extraordinarily high bond prices and low and in some cases negative yields. The next is that fact that his successors in charge of the various central banks may start pumping more monetary easing into this bubble to stop it deflating and it being “bad for everyone”. Indeed maybe this mornings ECB monthly bulletin is already on the case.

Looking ahead, the Governing Council confirmed that a very substantial degree of monetary accommodation is needed for euro area inflation pressures to gradually build up and support headline inflation developments in the medium term.

Let us look at what he actually said.

“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Federal Reserve chairman, 91, said in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

I find it intriguing that he argues that there is no bubble in stock prices which are far higher than when he thought they were the result of “irrational exuberance” . After all low bond yields must be supporting the share prices of pretty much any stock with a solid dividend in a world where investors are so yield hungry that even index-linked Gilts have been used as such.

What is a bubble?

This is hard to define but involves extreme price rises which are then hard to justify with past metrics or measurement techniques. With convenient timing we have seen a clear demonstration of one only this week as something extraordinary develops. From Sky Sports News.

Sky sources: Neymar agrees 5-year-deal at PSG worth £450m, earning £515,000-a-week after tax. More on SSN.

One sign that we are in the “bubbilicious” zone is that no-one is sure of the exact price as I note others suggesting the deal is £576 million. You could drive the whole London bus fleet through the difference. The next sign is that people immediately assure you that everything is just fine as it is normal. From the BBC.

Mourinho said: “Expensive are the ones who get into a certain level without a certain quality. For £200m, I don’t think [Neymar] is expensive.

To be fair he pointed out that there would however be consequences.

“I think he’s expensive in the fact that now you are going to have more players at £100m, you are going have more players at £80m and more players at £60m. And I think that’s the problem.”

Of course Jose will be relieved that what was previously perceived as a large sum spent on Paul Pogba now looks relatively cheap. Oh and did I say that the numbers get confused?

PSG’s total outlay across the initial five-year deal will come to £400m.

If Sky are correct the high property prices we look at will be no problem as he will earn in a mere 8 months enough to buy the highest price flat they could find in Paris ( £18 million). The rub if there is one is that the price could easily rise if they know he is the buyer!

The comparison with the previous record does give us another clue because if we look at the Paul Pogba transfer it has taken only one year for the previous record to be doubled. That speed and indeed acceleration was seen in both the South Sea Bubble and the Tulip Mania.

Perhaps there was a prescient sign some years ago when the team who has fans who are especially keen on blowing bubbles was on the case. From SkyKaveh.

West Ham were close to signing Neymar from Santos in 2010. Offered £25m but move collapsed when Santos asked for more money

Back to bonds

If we look at market levels then the warning lights flash especially in places where investors are paying to get bonds. If we look at the Euro area then a brief check saw me note that for 2 years yields are negative in Germany, France, Belgium, Italy and Spain. For Germany especially investors can go further out in terms of maturity and get a negative yield. Does that define a bubble on its own as they are paying for something which is supposed to pay you?! There are two additional factors to throw in which is that the real yield situation is even worse as over the next two years inflation looks set to be positive at somewhere between 1% and 2%. Also if we look at Spain with economic growth having been ~3% or so a year for a bit why would you buy a bond at anything like these levels?

Another sign of a bubble that has worked pretty well over time is that you find the Japanese buying it. So I noted this earlier from @liukzilla.

“Japanese Almost Triple Foreign Bond Buying in July” exe: buy or + buy => like a double chocolate pie

Here we do get something of a catch as the issue of foreign investors buying involves the currency as well. Whether that is a sign of the Euro peaking I do not know but in a way it shows another form of looking for yield if you can call a profit a yield. Also there is an issue here of Japanese investors buying foreign bonds not only because there is little or no yield to be found at home but also because the Bank of Japan is soaking up the supply of what there is.

Comment

If we survey the situation we see that prices and yields especially in what we consider to be the first world do show “bubbilicious” signs. If we look at my home country of the UK it seemed extraordinary when the ten-year Gilt yield went below 2% and yet it is now around 1.2%. Of course the Bank of England with its “Sledgehammer” QE a year ago blew so much that it fell briefly to 0.5% in an effort which was a type of financial vandalism as we set yet again assets prioritised over the real economy. What we are not seeing is an acceleration unless perhaps we move to real yields which have dropped as inflation has picked up.

So far I have looked at sovereign bonds but this has also spilled over into corporate bonds especially with central banks buying them. We have seen them issued at negative yields as well which makes us wonder how that all works if one of the companies should ever go bust. Yet we also need to remind ourselves that there are geographical issues as we look around as Africa has double-digit yields in many places and according to Bloomberg buying short dated bonds in the Venezuelan state oil company yields 152% although the ride would not be good for your heart rate.

 

 

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37 thoughts on “What evidence is there for a bond market bubble?

  1. its obvious the only way out is to keep printing and drive inflation. They’re just hoping they arent the ones in charge when it goes bang.

    • Keep printing and drive asset price inflation, screwing over the real economy so people like me who used to work long hours in productive manufacturing can’t be bothered to work more than 16 hours and ponce off other workers and the printing macking via tax credits

      I remember an interview with an American blue collar worker just as they bailed out the banks with printing, his words were visionary, he stated “its a billion dollar world now and people like him were irrelevant.”

      And May is too pathetic to do anything about this, she has to go.

  2. Very interesting, Shaun. I know nothing about the bond market, but don’t the extraordinarily expensive bonds also show the fear out there in the market? If people are buying things with a guaranteed loss, doesn’t that mean that they are scared of bigger losses elsewhere?
    I suspect that QE will go into overdrive if the bond markets crash, leading us ever deeper into uncharted territory.
    There was an interesting letter in Private Eye this week, effectively claiming that Corbynomics will work because of the availability of QE – I have been waiting for someone to say that there is a magic money tree and there it is.

    • If they keep on this path its inevitable Corbyn will win. Sooner give his brand of socialism a try as opposed to the current system of socialism for the rich and asset owners … At least i might get a crumb from his table with Corbyn, there is no chance of that happening with bought and paid for politicians like Hammond and Carney running the economy.

      • Arthur
        Look at Venezuela to see what happens with socialism.
        You will end being thankful for a crumb.

        Printing money always leads to trouble and the B of E is doing exactly that!
        Some reality needs to return to the financial world, an increase in the Bank rate is well overdue and QE should stop.

        As Shaun implies continuing on the current path will lead to a crash.

        • Or Nick, you could look to the Nordic countries to see what happens with socialism, note the small “s”. A former Nowegian Prime Minister described Corbyn’s policies as mainstream middle of the road. Your comparison to Venezuela is therefore ridiculous.

        • My point is we have socialism of the most extreme kind, just its for the rich and asset owners.

          At the moment i do not have a crumb and neither do many young and not so young who’ve little chance of buying a crumb with wages … hence why we’ll vote Corbyn. I can’t stand Labour but anything apart from the status quo is worth a try.

          What we need is capitalism, but there is absolutely no chance of that happening.

          And to be honest i don’t believe the BBC and Skys reporting on Venezuela and i don’t know enough of the ins and outs of this country to know what is actually going on and i don’t suppose many in the UK do.

    • As Shaun has demonstrated, the price of bonds is supported by CB’s, not real investors, the rest of it is down to Pension funds required by their mandates to buy bonds whatever the price to try to match maturing liabilities, again, nothing to do with real investors being “scared of bigger losses elsewhere” because real investors aren’t there anyway. They are to nick your own statement “elsewhere” i.e. exactly where you seem to think they are not!

  3. It’s funny when you get Greenspan warning about bubbles without any hint of irony.

    Here’s a man who led the world in can kicking into the Tech bubble.How I remember the world worrying about his reappointment

    From 2000
    https://www.wsws.org/en/articles/2000/01/gnsp-j13.html
    ‘With last week’s announcement, Clinton has sent a clear signal to Wall Street that Greenspan will have a free hand to pursue the economic agenda that has enriched the top 10 percent of the population beyond their fondest dreams, regardless of the ups and downs of election polls and the ultimate result of the vote next November. ‘

    Now they’ve cut some of the 10% out.

  4. “makes us wonder how that all works if one of the companies should ever go bust…”

    depends on if any of the Banks will be dragged down , doesn’t it ?

    if have the world’s wealth is now owned by 5 people , it take little imagination to see 99% of the worlds wealth owned by one person

    he ( its most likely to be a he ) will be the King of the world….

    Dystopia , or the normal human outcome?

    Forbin

    PS: so if the CB own companies , at what point does the market become obviously rigged ?

    • Hi Forbin

      Your last question is an excellent one. I can say that the rigging starts with the first purchase but where the precise rubicon is I am not sure. I will be watching the Tokyo Whale as it chomps through the Japanese equity ETF market for more clues.

      Your first question reminds me of the Bank of England analysis on the car finance market. Apparently it does not matter much if makers of unimportant actual things used hit trouble but it is both urgent and vital if the producers of pieces of paper and money do.

  5. I remember the Greenspan, Summers & Rubin cover of ‘ Time ‘ magazine of 1999, which carried the title of ‘ The Committee to save the World ‘ ……I would keep my mouth shut if I were him.

    • Hi Dutch

      With your Swiss example there is a link to yesterday. Say you accepted a negative yield to be long the Swiss Franc but now it is falling. This is the sort of situation where both markets can be very unstable and move quickly as well as feeding off each other.

  6. There is no end to this insanity, the bond vigilantes used to keep governments in check and prevent distortions such as we have now and prevent low interest rates undermining sound money as they are now(highly negative), not any more, central banks now have the whip hand and are using it without prejudice to pursue a pre-determined agenda.

    The US stockmarkets are on the edge of either breaking out to new highs suggesting the bubble is entering its next vertical phase or breaking down and presage the re-start of QE and possibly more cut rates, this is a very dangerous time to be in the stockmarket, who knows what the globalists have planned for the next stage of the game?

    • Hi Kevin

      The governments came up with a cunning ruse to defeat the bond vigilantes. They set up central banks as “independent” and under such a smokescreen the central bankers were able to pursue policies the politicians feared to try. Just by chance the lower bond yields benefit political spending plans…..

      As to stockmarkets the numbers keep on coming as we see 22,000 on the US Dow Jones. Sake time at the Bank of Japan and cognac for the Swiss National Bank.

    • US stock markets are reasonably priced on a P/E ratio. It’s not dangerous at all but it is risky as always.

      P.S. I’m still waiting for your predicted sterling collapse “all the way down to zero”…..

  7. Hi Shaun
    I am totally frustrated by the shenanigans going
    on with all forms of markets, bonds, currencies and some
    commodities so here is a little known footballing fact.
    It was rumoured that West Ham couldn’t sign
    Neymar because they were unable to sell enough
    Billy Bonds!

    JRH

  8. Interesting topic Shaun zero hedge article today reporting Apple own $51B of US treasuries.
    Interesting that a company renowned for creativity and innovation would invest in iou’s of a country that is $20T in debt….oh I forgot it is a safe haven.
    Along with its economic allies in a system where they spend money on an annual basis that they do not have,but then print more money out of thin air to suppress interest rates on the debts that are continuing to increase exponentially.
    Why would anyone think there is a bubble or a problem the MSM don’t .
    That nice Mr Carney was on the Government Channel tonight telling us things were not roses in the garden.
    We the common people are being fleeced by falling wages,rising property prices,practically non existent return on savings and being told we need to work longer because we are living longer.
    The collapse is happening right now people just don’t see it …distracted by those clowns paying £200M for Neymar….Rome,bread and circuses.

    • Hi PrivateFraser

      I would love to be at the audit meeting for Apple and when that particular holding came up I would simply ask why? As you say it is a type of defeat especially if they admit to the real reasons why!

    • I”nteresting that a company renowned for creativity and innovation would invest in iou’s of a country that is $20T in debt”

      That’s a good question and you should ask if a successful company like Apple are wrong or you are wrong.

      “….print more money out of thin air to suppress interest rates ” and there was me thinking the Fed had raised twice thus far!!

  9. “After all low bond yields must be supporting the share prices of pretty much any stock with a solid dividend in a world where investors are so yield hungry that even index-linked Gilts have been used as such.”

    It’s Price/ Earnings ratios that count if you’re after yield and there’s plenty of companies about with reasonable ratios if you look which is why Greenspan does not talk of a stocks bubble.

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