Wednesday, August 12, 2015

Nope, there's no bubble in bonds

A big headline this week is that there is a bubble in bonds. This comes from the former head of the Federal Reserve Bank, Alan Greenspan, the man who presided over the tech stock bubble and the housing bubble and did nothing to prevent either of them. So his expertise in this area is questionable.

Greenspan's reason for announcing a bond-market bubble is also questionable. He says the return on investment for bonds is too low for the price of the bond itself. But the return rate on bonds is set by the government, which could raise the rate at any moment to whatever it likes, but refuses to do so because they are afraid of starting a recession. Likewise, investors in bonds are not concerned about the return on their investment. No, they are looking for a place to put their money where it will not decline in value.

China has just devalued its currency by 12% in 2 days. But all of its US bonds, held in dollars, have remained almost steady in value. So why is China investing in bonds? Because it's a good investment for them and they don't care what the return on investment is.

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