It's becoming increasingly popular to describe the U.S.
government bond market as a "bubble".
As I've previously explained
, this strikes me as totally nonsensical for several reasons - the
primary reason being that the term simply is not applicable to an
asset in which you receive your entire principal back at
The term "bubble" implies a grossly mispriced asset that is
susceptible to substantial losses. If the instrument is used as
intended there should be little to no risk of principal loss in a
U.S. government bond. And given the weak economy and constant need
for government intervention it is no surprise that investors are
seeking a safe haven such as bonds.
Aside from all that, Credit Suisse recently published an
interesting piece of research arguing the same point - that the
U.S. bond market is not a bubble. They noted that the price action
in government bonds is very different from historical bubbles:
We note that the price action of bonds it is very different
from the bubbles in other asset classes we have seen over the
last 30 years. The six-month US bond return is 1.9 standard
deviations above norm, compared to an average of 5.9 standard
deviations during previous bubbles.
So you can see the price action is not even remotely similar to
the great bubbles in history. If investors continue to use
government bonds as they are intended (for instance, don't make a
10 year loan with the intention of demanding your money back in 10
minutes), diversify across bond markets and generally allocate
bonds as they are intended
(as a hedge against other higher risk assets
) then there should be very little risk of you ever experiencing a
catastrophic loss such as those seen after many of the great
bubbles of the last 30 years.
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