Alan Greenspan, former chairman of the Federal Reserve, has been making headlines after suggesting that government bonds may be a bubble about to burst. Greenspan is no stranger to calling crises before they occur. His “irrational exuberance” speech which preceded the Dot-Com bubble created a term that has helped define the latter part of his career, and continues to describe vulnerable markets in times of hysterical prosperity. To many, this sounds like a description of the times we live in.
— Bloomberg (@business) August 10, 2015
However, Greenspan’s argument isn’t based on the state of equities, it’s about the ongoing low rates of interest in Treasuries, which at the time of this writing are as follows:
30 year t-bond 2.808%
10 year t-note 2.232%
5 year t-note 1.798%
2 year t-note 1.347%
Not since the time of Alexander Hamilton (1st United States Secretary of State from 1789-1795) have treasury yields been this low, Greenspan emphasizes, and “there is only one direction in which they can go, and when they start, it will be rather rapid.”
Greenspan doesn’t indicate a time or date for the upcoming bond kablooey. But he does say that, when it happens, stock prices will be adversely affected. For people already worried about the vulnerable position of stocks, still topping themselves week after week, this isn’t good news.
Other Sides to the Story
Other analysts disagree. Mart Grant claims that rates can go even lower, without weighing down equities. He cites ongoing stimulus liquidity that continues to buoy company valuations.
Ben Emons argues that due to low unemployment combined with lower-than-average productivity is unlikely to lead to the kind of inflation that often precedes recession, disincentivizing the Fed to pump the brakes. The Fed is also unlikely to raise rates now because the economy lacks volatility. Why fix what isn’t broken?
Tax reform and national finance plays prominently in the upcoming congressional calendar. We’re approaching a new debt ceiling fight, with the possibility of default looming over a legislative body that just struck down multiple attempts to repeal or replace the Affordable CAre Act. Rates lowered following resolutions to debt ceiling issues in 2011 and 2013. We may see the same effect this time.
I remain unconvinced that the Federal Reserve will be compelled to raise rates quickly or in succession. This is not to say there isn’t a bubble somewhere, that an unanticipated vulnerability could put a stop to the ongoing party on Wall Street, but I don’t expect it from Bonds. Not yet at least.