INFOGRAPHIC: The Bond Bubble

The Bond Bubble – The Bond Bubble Infographic from The Austrian Insider

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After recently noticing ten year treasury yields on the rise (passing 2.1%), I thought it only necessary that a visualization of the massive bond bubble be made.  It could be that the bond bubble is near bursting, or just that the Federal Reserve will be increasing their bond buying program at any moment.

Bond yields have overall been in decline for just about 30 years.  Low interest rates normally reflect a high savings (just imagine trying to get a personal loan).  Yet as our debt continues to grow, and our ability to pay it diminishes, one would expect interest rates to be drastically on the rise.  There is one reason bonds are able to maintain their low yields:

The Fed is the main buyer.

Investors are OK with losing money due to inflation because they expect to sell their bonds at a higher value to the Fed.  No one is buying a 10 year treasury bill expecting to hold onto it until maturity.  Without the Fed buying these bonds, investors would be forced to analyze how profitable of an investment bonds are, and after realizing they are losing to inflation, everyone will head to the exit doors.

Once this happens, you are left with two scenarios: the final couple of graphs provided in the bond bubble infographic.  Either we let interest rates rise, and the government is forced to restructure it’s debt, banks fail, and no stimulus is provided – or we never let interest rates rise and we suffer the same fate so many countries before us have faced: hyperinflation.

It could be argued that Japan, UK, and others are in the same boat, or in even worse shape than the United States.  It is impossible to tell which country will face a sovereign debt crisis first, but there is no denying the irrational exuberance in the United States treasury bond market.

Be sure to come back for more Austrian Economic News and read my original Bond Bubble post for more information.


Author: Sean Aranda