If hindsight is 20/20, maybe current perception is more like 50/50. Loads of economists and other experts have recently declared that the bond market has swelled into an unsustainable bubble. Wharton’s Jeremy Siegel among them.
But Yale professor Robert Shiller, an expert in bubbles and the author of Irrational Exuberance, isn’t convinced. About 18 minutes into this interview with the Wall Street Journal in which he voiced worry about a double dip recession, Shiller hesitates to label the bond market a bubble. “It’s a gray area,” he says. “But to me it’s not quite a bubble.” That’s because Shiller defines a bubble as ” a time of expected future dramatic price increase that is brought on by psychological extrapolation of past price increases. I tend to think of the Treasury prices as more of a flight to safety and quality rather than a bubble. ”Vodpod videos no longer available.
But bonds may not be much use as a flight to safety either, argues Prieur de Plessis in a piece up Friday. de Plessis makes the interesting argument that anyone investing in Treasuries as a haven hasn’t taken into account the fact that bond volatility now looks a lot like the volatility of equities and commodities.
“Traditionally, bonds are considered to be safer and less volatile than equities and commodities. However, the financial markets have evolved in such a way that the same players are active in all sectors, employing the same trading techniques,” Plessis argues. Therefore bonds are not really any longer a safe haven.
Below is his chart comparing TNX, the Chicago Board of Exchange Interest Rate 10-Year, in blue, and the S&P 500 via GSPC in red.