Wall Street shills are in near perfect agreement that the bond market is not in a bubble. And, even if there are a few on the fringes who will admit that one does exist, they claim it will burst harmlessly because the Fed is merely gradually letting the air out from inside. However, the fact that we are in a bond bubble is beyond a doubt—and given the magnitude of the yield distortions that exist today, the effects of its unwinding will be epoch.
Due to the risks associated with inflation and solvency concerns, it should be a prima facie case that sovereign bond yields should never venture anywhere near zero percent—and in some cases, shockingly, below zero percent. Even if a nation were to have an annual budget surplus with no inflation, it should still provide investors with a real, after-tax return on government debt. But in the context of today’s inflation-seeking and debt-disabled governments, negative nominal interest rates are equivalent to investment heresy.
At its peak in 2016, there was a total of over $14 trillion worth of global sovereign bonds with a negative yield—mostly in European and Japanese debt. And even though that total has decreased recently, it is still above $8 trillion.
And although the U.S. Ten-year Treasury note yield has never been negative in nominal terms, it is still clearly in the sub-basement of history.
Given these facts, any free-thinking individual must assent that the global bond market is in a bubble. This situation may be definitely worse overseas, but the U.S. bond market still suffers from the same contagion. Given our trillion dollar annual deficits, a national debt that is $21.5 trillion (105% of GDP), and consumer price inflation that is above the Fed’s 2% target, the abnormality in U.S. rates is completely absurd.
The key to this whole discussion about bonds being extraordinarily overvalued is the arrival of inflation on to the scene, which had been absent for a decade in the eyes of the consumer because it was mostly sequestered within the stock, bond and real estate prices.
