Bond bubble


There is still a lot of talk about the bond bubble with so many people expressing their opinions about bond yields being too low. Maybe.

But I thought it might be informative to show that my bond valuation model says that bond
yields are almost exactly where this “objective” analysis says they should be.


Yes, it is the product of a “model” that may or may not be right and even though I have been using this model almost exactly as it is for some 15 to 20 years there is always the possibility that it will blow up next month.

One interesting point is that the model goes along with the Wall Street Journal’s editorial page quarter century campaign to point out that federal debt and interest rates have a negative correlation. At least they push this idea when republicans are in the White House. They are right that cyclically as the government debt rises rates fall and as the debt contracts rates rise. Of course this reflects that the cyclical federal deficit is inversely related to private credit demands. So on a cyclical basis the large federal debt is largely a function of the collapse in private credit demands.

Note that the fitted value ticked up, suggesting that on a short run basis yields may be bottoming. Interestingly corporate America is starting to issue a lot of long term debt.
For example, IBM just floated a large long term bond. Historically IBM has a good long term history of floating large debt issues around the cyclical bottom in rates. There are some sharp people in the IBM treasury operations.

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