Counterparties: Not all that bursts is a bubble
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If you arenât 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.
Thereâs nothing particularly new about these warnings. Businessweekâs Roben Farzad charts the âmany cautionary, even alarmist, headlinesâ that have appeared over the last six months. Quartzâs Matt Phillips says that we are now in the fifth year of headlines warning of a spike in rates.
The Washington Postâs Neil Irwin canât find much evidence of a bond bubble, concluding that ârising rates [are] more likely to occur for good reasons — because the economy is getting back on track — than for bad reasonsâ. All the worry is âpeculiar legacy of the financial crisisâ. âAmong the financial commentariat,â he writes, âthere is a tendency to see a bubble whenever the market for a particular asset risesâ. Calculated Riskâs Bill McBride agrees: âI don’t see speculation, significant leveraged buying, storage or any of the other factors that defined a housing bubbleâ.
There might not be a bond bubble, but that doesnât mean bonds are a safe place to invest. On PIMCOâs website, Bill Gross has an âinvestment outlookâ thatâs more detailed than his CNBC appearances. He makes the case that rising rates arenât themselves what scares him. Instead, itâs the increasing amount of debt required to generate growth: âIn 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 resultâ. That, Gross says, is a problem akin to a supernova expanding by consuming itself. Itâs 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. Thatâs 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 todayâs links: