“The Biggest Bond Bubble In History”

Written by: Jack Boylan

Who said this rather inflammatory statement? Well, if you guessed some college-aged Ron Paul follower or some equally zealous gold bug, you would be in err. Actually strike that, as the people in those two groups (who are far from mutually exclusive) probably say something similar every day of the years(s). In this case though, the quote is coming from someone who actually has a say in the matter, namely a policy maker from the Bank of England. And outside of the “biggest bond bubble in history” statement he tries mightily to couch the rest of his views in typical bureaucratic jargon. Despite these efforts, the bottom line shines through and it is not pretty. On the odds of a bond bubble bursting he testifies that it is something “I feel acutely right now”. And it doesn’t take a legislative lawyer to figure out what he means here:

But he described bond markets as the main risk to financial stability. “If I were to single out what for me would be biggest risk to global financial stability right now it would be a disorderly reversion in the yields of government bonds globally.” he said. There had been “shades of that” in recent weeks as government bond yields have edged higher amid talk that central banks, particularly the US Federal Reserve, will start to reduce its stimulus.


Indeed there have been “shades of that” recently. I think it is fair to say that there have been more than a few people a bit startled upon opening their recent brokerage statements and discovering that their bond funds have been diving like a bad penny stock. And that could be just a taste of things to come. If the original housing bubble was caused by Fannie and Freddie jumping into sub prime mortgages (with a more than willing assist from Wall Street), then it certainly would not be a stretch to think the current bond situation has more than a few similarities. As more and more of the world’s biggest economies jump onto the “Quantitative Easing” (QE) programs (I’m looking at you Japan!) it is hard not to get the feeling of something artificial happening. And don’t think that this policy maker is just one rogue joker spinning conspiracy theories. When asked for comment, the Bank of England made the usual caveats about his statements reflecting his “personal view”, but then said this:

“Any attempt to return interest rates quickly to more normal levels would recreate recession conditions,” the Bank of England.

Hmm… well, that is certainly one way to put it. Look, none of this is new, and many people have been warning about the same thing since the very first QE was put into place. But when even the Bank of England is worried, it may be time to sit up and take notice. Bubbles can last for a long, long time and there is no way to know for sure when they might end or how badly they will end. The bubble may even turn out to be more like a balloon that slowly loses air with plenty of time to shift one’s assets around in an orderly and calm manner. But when one of the architects of a policy baldly calls it a bubble, it sure won’t hurt to take a bit of a risk inventory of your portfolio. It may be that bonds solid performance has lulled many to complacency. Now might be a good time to take a look at your bond exposure and confirm that your allocation is such that you are still comfortable.


“The Biggest Bond Bubble In History”

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