Deutsche Bank: Global government bond market in a bubble

We’re rolling in the bubbles! That has been the prevailing message for much of 2014.

For the past year, many mainstream and contrarian investors have agreed that some elements of the stock market are in a bubble, especially when it comes to social media and biotech stocks. In relation to the bond market, there have only been a few who have alluded to its bubble appearance, including former Reagan budget director David Stockman.

Last week, Deutsche Bank strategists led by Jim Reid wrote in MarketWatch that the global government bond market is on the cusp of a bubble as it already looks to have some of the frothiness. The financial analysts opine that the bond bubble has nowhere else to go since it’s already in the hands of governments and central banks.

“The worry is that there is nowhere left for this bubble to go given that it is now in the hands of the lenders of last resort (governments and central banks with regulators ensuring other large captive buyers),” the economists wrote. “Although we think this bubble needs to be maintained to ensure the solvency of the current financial system, the best case scenario is that it slowly pops over time via negative real returns for bondholders. The worst-case scenario being future restructuring.”

Although this an important warning from one of the biggest financial institutions in the world today, many are dismissing their cautious behavior, citing their likely concerns ahead of the upcoming Federal Reserve meeting – it’s likely that Fed Chair Janet Yellen will still keep interest rates at record lows.

Nevertheless, Stockman has been one of the early financial minds to outline the dangers of the bond bubble. Stockman, the bestselling author of “The Great Deformation,” has previously stated on numerous occasions that much of the central bankers today are “bubble-blind,” probably since their cohorts – speculators and bond traders – have established the “greatest bond bubble in history.”

“Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere,” Stockman told CNBC late last year. “It’s only a question of time before the central banks lose control, and a panic sets in when people realize that these values are massively overstated.”

Despite the abundance of information supporting Deutsche Bank and Stockman’s contentions, the latest American Association of Individual Investors survey of weekly sentiment highlights that 40 percent are bullish on stocks this week. Of course, these are same the investors who didn’t see the financial collapse coming a few years ago.

Like this article? Get ECN delivered to your inbox daily. Subscribe here.


  1. Hmm … But do you thing the world will go down in an other crisis or we will just have a slow decline over the next years

Leave a Comment