Alan Greenspan, the former Federal Reserve chairman who has a knack for saying memorable things about the markets, is warning of a bond bubble.
“By any measure, real long-term interest rates are much too low and therefore unsustainable,” Greenspan told Bloomberg News in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”
The economy is about to enter a phase of rising inflation, and that sets up the bond market for overheating if it continues. Already Treasury yields have fallen so much there doesn’t seem to be room to go lower. Bond yields move inversely to bond prices. Before 2008, the 10-year Treasury bond yielded 4 percent or more. That yield has been persistently below 4 percent since then, currently at 2.3 percent. Eventually, things should revert to normal, and that’s what’s worrying the former Fed chairman.
Greenspan, who has talked about a bond-market bubble for a couple of years, adds in the interview, “When the bond-market bubble collapses, long-term interest rates will rise.”
That could spill over to the stock markets, which keep hitting record highs. Greenspan and others use a method called the Fed Model, which looks at the price of stocks versus bonds. Investors would rightly pick the undervalued asset, and right now, that is stocks.