I saw no less than three articles over the weekend talking about the bond bubble. The bond market is not in a bubble phase. Bubbles are events like the South Sea Company fraud in 1720, when the South Sea Company bought up most of the British government debt. They negotiated an interest rate and got trading privileges to ports in China and Peru. Everyone knew there were pots of gold to be had and nobody paid attention to the Spanish government restricting the number of trading ships in and out of South America. As the history books tell us, some politicians were in on the deal. Imagine that. The stock of the South Sea Company went from £128 to £1000 and back, in nine months. The small investor who tried to go along for the ride on this, or on many other trading companies that raised capital and disappeared, got devastated. Most "investors" were wiped out.
The Tulip Bulb Mania struck Holland around 1637, and it got so out of hand that some tulip bulbs cost ten times the annual salary of a skilled craftsman. Records show twelve acres of land were once offered for one bulb. Some recent historical reinterpretation has taken a calmer look at the period, but the point is that many investors were wiped out.
We all know about the dot.com bubble. Companies with no revenues and no earnings were being valued on "eyeballs" and the "new economy" was going to rule and the "old economy" was done for. And millions got wiped out. And more millions got steamrollered and lost their homes in the real estate bubble. That one really hurt because we all knew you couldn't lose money in real estate.
Bubbles require excessive speculation, extreme leverage, and the possibility of complete loss of investment. Then, to complete the cycle, you need actual loss of capital. If you buy ten-year government bonds, for example, you might lose buying power if inflation were to return. But if you hold them to maturity you will get your principal back. You might have gotten a disappointing inflation-adjusted return, but I suspect a lot of dot.comers wish that were the worst of their experiences. Sorry, no bubble.
There is now consideration being given to selling 100-year bonds. It sounds crazy on the face of it, but insurance companies and pension funds could be eager buyers to be able to match their liabilities. They have been sold before, as an article in Monday's Wall Street Journal pointed out. They are most often offered by high-quality corporations. But with trillion-dollar deficits staring at us and with the average maturity of US debt being less than five years, the US government should sell every 100-year bond the market will take. Financing the deficit in the short end with rates so low is appealing. But some day rates won't be so low and we will have to turn the entire debt over in a very narrow window. It could/will get expensive. The aforementioned article referred to bankers who think it would take 0.75 basis points more than 30-year debt to entice buyers. It makes sense to me.
