Counterparties: Not all that bursts is a bubble
Welcome to the Counterparties email. The sign-up page is here, itâ€™s just a matter of checking a box if youâ€™re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
If you arenâ€™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.
Thereâ€™s nothing particularly new about these warnings. Businessweekâ€™s Roben Farzad charts the â€śmany cautionary, even alarmist, headlinesâ€ť that have appeared over the last six months. Quartzâ€™s Matt Phillips says that we are now in the fifth year of headlines warning of a spike in rates.
The Washington Postâ€™s Neil Irwin canâ€™t find much evidence of a bond bubble, concluding that â€śrising rates [are] more likely to occur for good reasons — because the economy is getting back on track — than for bad reasonsâ€ť. All the worry is â€śpeculiar legacy of the financial crisisâ€ť. â€śAmong the financial commentariat,â€ť he writes, â€śthere is a tendency to see a bubble whenever the market for a particular asset risesâ€ť. Calculated Riskâ€™s Bill McBride agrees: â€śI don’t see speculation, significant leveraged buying, storage or any of the other factors that defined a housing bubbleâ€ť.
There might not be a bond bubble, but that doesnâ€™t mean bonds are a safe place to invest. On PIMCOâ€™s website, Bill Gross has an â€śinvestment outlookâ€ť thatâ€™s more detailed than his CNBC appearances. He makes the case that rising rates arenâ€™t themselves what scares him. Instead, itâ€™s the increasing amount of debt required to generate growth: â€śIn 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€ť. That, Gross says, is a problem akin to a supernova expanding by consuming itself. Itâ€™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. Thatâ€™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 todayâ€™s links: