Bonds: Are Treasuries in a Bubble?

A reader asked if I thought the treasury market was in a bubble. He was probably prompted by this news about bill rates going to zero.

The word bubble is a tad overused doesn’t really bring much to the table in terms of figuring things out. If you think it is a bubble fine, if not that’s fine too.

Clearly the action in the bond market is bizarre and might be telegraphing a problem coming, a big problem. I am probably not the one to tell you ahead of time what the dominoes will be so much as point out a couple of watchout situations.

Clearly there has been a buying panic in treasuries of all maturities. The ten year is under 3%, the 30 year is close to 3% and the shortest bills are at zero with some wondering if yields will go negative. Municipal paper is yielding a lot more than treasuries with like maturities. Corporate paper is doing odd things as well–spread wise.

This all strikes me a a warning. The muni over treasury yield is not a blip for a day or two but has been going on long enough to reasonably be called persistent. Some have said the bond market might be worse off than the equity market and I think that is pretty close to right.

Treasury rates are essentially at all time lows. At some point when something (the yield) can’t lower then it will go higher. Yield up means price down. The money being printed for all these bailouts creates a path for price inflation (larger money supply is the definition of inflation) once the asset deflation ends if not sooner. This threat could cause anyone buying our debt to demand higher yields for the various risks they are assuming. This is also an argument for a weaker dollar.

There is nothing that says this has to be the outcome, although it is what I believe, and obviously it is ok to look at this and draw a different conclusion but if you manage your own portfolio you should know some of the particulars and have an opinion.

If you use fixed income as a means of evening out the equity portion of your portfolio then I would say this is not a great time to be overly aggressive.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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