Counterparties: Not all that bursts is a bubble
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If you aren’t terrified about the coming bond bubble, you should be, according to those who have taken it upon themselves to play interest-rate Paul Revere. Finance heavyweights like Lloyd Blankfein, Gary Cohn, Bill Gross, and Jeff Gundlach have each voiced their concern. Fitch has chimed in too.
There’s nothing particularly new about these warnings. Businessweek’s Roben Farzad charts the “many cautionary, even alarmist, headlines” that have appeared over the last six months. Quartz’s Matt Phillips says that we are now in the fifth year of headlines warning of a spike in rates.
The Washington Post’s Neil Irwin can’t find much evidence of a bond bubble, concluding that “rising rates [are] more likely to occur for good reasons — because the economy is getting back on track — than for bad reasons”. All the worry is “peculiar legacy of the financial crisis”. “Among the financial commentariat,” he writes, “there is a tendency to see a bubble whenever the market for a particular asset rises”. Calculated Risk’s Bill McBride agrees: “I don’t see speculation, significant leveraged buying, storage or any of the other factors that defined a housing bubble”.
There might not be a bond bubble, but that doesn’t mean bonds are a safe place to invest. On PIMCO’s website, Bill Gross has an “investment outlook” that’s more detailed than his CNBC appearances. He makes the case that rising rates aren’t themselves what scares him. Instead, it’s the increasing amount of debt required to generate growth: “In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result”. That, Gross says, is a problem akin to a supernova expanding by consuming itself. It’s also far beyond the limits of a bond bubble, and closer to arguments about the end of growth itself.
If that sounds a little far-fetched, look at the latest estimates from the Congressional Budget Office, which project years of depressed growth and high unemployment in the US. That’s a far bigger problem than too many people buying bonds at low rates — in fact, low growth and high unemployment, as the BIS noted in December, are most of the reason why rates are low. — Ben Walsh
On to today’s links: