Is There a Bond Bubble?

Lately, there’s been a lot of talk among financial bloggers of a Bond Bubble. There very well could be but the key question is, a bubble relative to what?
Compared with stocks, yes, I think bond yields are far too low. My hope is that stocks will rise to bring the two into better balance. You can think of investing as a perpetual battle between stocks and bonds. Is it better to raise money by borrowing, or taking on new partners? Understanding that key fact is to see how the market works.
The plus of borrowing is that when you’re done renting someone else’s money, it’s over. Taking on new partners never goes away unless you by them out. The negative of borrowing is that you have to pay interest, so whatever you sell, a few pennies in price goes towards paying interest. The positive of equity financing is that there’s no up-front cost.
Right now, I believe bond yields are very, very low, even adjusting for inflation. Just look at the TIPs yield curve.

The TIP coming due in July 2010 currently yields just 1% over inflation (or rather, over the CPI). In my opinion, that’s awful.
I don’t, however, believe that bond yields will plummet like dot-com stocks did 10 years ago. Rather, I think investors are unduly fond of the security of Treasury bonds. Sure, they’re safe but that safety comes at a price. One percent real yield for 10 years is too rich for me. The good news is that our massive debt can be financed rather cheaply.

Posted by Eddy on August 19th, 2010 at 12:40 pm

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.