Falling bond yields may be less a sign of a bubble than a reflection of the long-term trend of a mature market
- The low interest rates and bond-buying schemes of central banks are pushing up prices, creating what some fear to be the mother of all bubbles in bond markets
- But with no sign of investor speculation, gradually falling bond yields may actually be the result of a structural market change
As a kid, the fun thing about bubbles was how big you could make them before a very satisfying “pop”. For investors, bubbles aren’t nearly so much fun, especially if they create a mess when they burst. Neither is there much chance of spotting one before it actually pops.
Of course, bond prices and yields move in opposite directions. Just like opposite ends of a see-saw: when yields go up, prices go down; and vice versa.
At current record-low yields, the US government bond market is the most expensive it has ever been. The yield on long-dated 20-year US government bonds fell to a record low of 1.82 per cent in the middle of February, and the yield on the benchmark 10-year bond matched its lowest point, 1.35 per cent, since the global financial crisis.
Yields are falling because of risk aversion in the wake of the coronavirus epidemic. However, even before this, there were concerns that central banks’ pursuit of persistently low rates was creating the mother of all bubbles in the bond market.