Yahoo Finance “Bond bubble” overblown?
Are we in the midst of a "bond bubble"? There’s been a lot of speculation lately about the drop in the U.S. bond market yields and debate about whether central banks have spawned an asset bubble by manipulating monetary policy through zero-interest-rate policies and quantitative easing. Yet there are other ways to explain this world of ultra-low bond yields.
“Yields are very low for a number of reasons,” says Jurrien Timmer, Director of Global Macro at Fidelity Investments. “Central banks have distorted yields lower by doing all this quantitative easing, and over the 10 past years if you look.. at the six largest central banks they’ve done about $16 trillion worth (of easing).”
Monetary policy, however, isn’t the whole story, says Timmer. “There’s another reason in all likelihood as well. We’re living in this post-crisis deflationary world and treasuries and other sovereign bonds, long-duration bonds, are an insurance policy against deflationary shocks.”
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The yield on the 30-year Treasury (^TYX) hit a record low of 2.25% in January, and while yields have since risen slightly higher to just below 3.0%, yields remain historically low. So what would cause yields to rise?
A sustained rise in core inflation could potentially cause yields to reset higher, explains Timmer. Recent inflation numbers from the Department of Labor show inflation on the rise, with core inflation rising 0.3% in April, its biggest increase since January 2013. A sustained rise in inflation would force central banks to tighten and end quantitative easing, putting a reset in yields in motion. With speculation that the Federal Reserve may hike rates as early as September, a reset in bond yields may not be far behind.
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