One of the kings of bubbles, Alan Greenspan, warned in an interview with Bloomberg Television that the United States faces a “pending bond market bubble.” This warning comes as the Federal Reserve continues to mull over raising interest rates from near zero in September, or delaying it until next year.
“We have a pending bond market bubble,” the former Federal Reserve Chair told the news outlet. “What ultimately will determine where it goes is to reach back and to ask ourselves where is the normal interest rate?”
“If we merely substitute the structure of equity prices, and we have the price of bonds, and instead of expected equity return we have expected interest rate return, that price earnings ratio is in an extraordinary unstable position.”
From Bloomberg:
Treasury yields have been anchored by the Fed’s policy of keeping its main interest rate close to zero since 2008 to support the U.S. economy. The Fed’s benchmark, the target for overnight lending between banks, has averaged about 2.70 percent in the past 20 years.
Benchmark U.S. 10-year note yields fell five basis points, or 0.05 percentage point, to 2.18 percent as of 10:27 a.m. London time, according to Bloomberg Bond Trader data. The price of the 2.125 percent security due in May 2025 rose 13/32, or $4.06 per $1,000 face amount, to 99 1/2.
Ten-year note yields are about half their average over the past two decades and are within a percentage point of a record low set in 2012. They will climb to 2.82 percent by the middle of next year, according to a Bloomberg survey of economists with the most recent forecasts given the heaviest weightings.
He likened the matter of interest rates to “behavioral economics,” nothing that the issue of what the optimal interest rate is “is a behavioral issue.”
Greenspan also touched upon low productivity levels as being a challenge to both the United States and other developed countries.
Moreover, he noted that he “knew something was brewing” in terms of the housing bubble but he “missed the actual date as in, frankly, did everybody else.” Huh? There were so many financial experts, notably Peter Schiff and Jim Rogers, who were correctly predicting a bubble and a burst.
Greenspan served at the helm of the Fed from 1987 to 2006.
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