Economist and Nobel Peace Prize winner Robert Shiller warns that the bond market may have joined the bubble territory alongside the real estate market and stocks. Ostensibly, he has hopped on the bond bubble bandwagon alongside David Stockman.
Speaking in an interview with CNBC to discuss his new edition of his 2000 book “Irrational Exuberance,” Shiller averred that the United States bond market, which has shown signs of low yields, may have actually gone through a bubble and may collapse sometime in the near future.
He purported that the easing perpetraed by central banks worldwide have contributed to these depressed yields, but noting that the problem is more than just the likes of the Federal Reserve, the Bank of England, the Bank of Canada and the People’s Bank of China.
“It’s something about our investment opportunities and our fears and our culture,” added Shiller. “So it’s a very deep phenomenon.”
The Yale professor believes “it’s a risky time to be investing in long-term fixed income.” However, Shiller doesn’t foresee an imminent crash, but a collapse in the bond market could be looming in the coming years.
“Yields have been trending down since 1981, over 30 years now,” Shiller said. “There could be a major turning point again in coming years, but I see no reason to think that such is imminent.”
For the past couple of years, since the release of his groundbreaking book “The Great Deformation,” Stockman, who was a budget director in the Reagan administration, has stated that speculators and bond traders have produced the “greatest bond bubble in history.”
“When it bursts, there will be no new round of bailouts like the ones the banks got in 2008,” wrote Stockman, a former senior managing director at Blackstone Group LP. “Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.”
David Oakley of the Financial Times wrote late last year that a major sell-off could take place because of the disconnect between the Federal Reserve and the international bond market.
Here is what he wrote:
“It is a mug’s game trying to predict markets, as the spectacular failure of most bond forecasts this year proved. But with Fed policy makers and the markets so badly out of sync over the path of rates, there has to be a possibility that the bond markets in 2015 will experience a similar collapse to 1994, when yields nearly doubled in value.”
As the chart below illustrates, the global bond market is a toxic area that should be avoided at all costs.
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