U.S. government bonds sold off last week following December Fed meeting minutes indicating growing doubts inside the central bank about the effectiveness of quantitative easing. Yields on benchmark 10-year notes hit an eight month high of 1.975 percent on Friday, in part as investors priced out some of the Fed asset purchases traders had been counting towards the end of 2013.
Other forces were also at work. Markets were relieved that the ‘fiscal cliff’-related expiration of Bush-era tax cuts had been circumvented, and encouraged by some moderately better U.S.economic data. The S&P 500 closed the first week of the year at its highest in five years.
Still, as has erroneously been the case in recent years, talk of a bond bubble resurfaced.
Richmond Fed President Jeffrey Lacker was asked about it at a bankers’ conference in Baltimore. He answered:
It’s virtually impossible to say something is a bubble in real time. I do think markets at times overshoot, and that could be possible in the long-term debt market.