The Bond Market Has Reached Tulip Bubble Proportions

Read More: Low Rates and QE are Deflationary at the Zero Bound

Leverage & Bond Market Instability in Overcrowded Trade

Therein lies the problem for the Federal Reserve and Central Banks around the world: They have enticed investors to chase yield at negative real rate scenarios with huge leverage to make such a low yield vehicle trade profitable and worth doing. This is going to cause massive instability to the financial system when this trade ends like we all know it will because the numbers involved are nonsensical to say the least. 

Unemployment Rate 5% in 2015

On Friday, one of the most dovish members of the Federal Reserve, San Francisco Federal Reserve Bank President John Williams, said the U.S. will see real GDP growth around 3 percent in 2015, and that the unemployment rate will touch 5 percent by the end of the year. Where do traders think that leaves the Fed Funds Rate? The U.S. 2-Year Bond is currently pricing in no rate hike for all of 2015 and 2016, and no inflation whatsoever, in fact a negative rate of inflation over the next two years. 

Read More: Even Mainstream Academia Worried about Massive Bubbles in Markets

The Tulip Lunacy in the bond market is just off-the-charts stupidity at its finest. Go ahead and buy the 2-Year Bond this upcoming week, I am sure this bond will be good in four months when the Fed hikes rates 25 basis points, maybe if you are lucky there is a greater fool than you, but from the stampede that is sure to follow on the exit of this trade at these prices in the bond markets, you better be first!

1 2
View single page >> |

All of the content on EconMatters is provided without assurance or warranty of any kind. The opinions expressed here are personal views only, and no warranty of fitness for any particular use, ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.
Sensible Cents 6 years ago Member's comment

Jan 14th 20yr treasury broke out to all new highs. so if breaking out now no way even close. Breaking out is not a bubble.

Carol W 6 years ago Contributor's comment

The Fed is not raising rates while Obama is still in office. The CEO from CAT waved a huge red flag on the fragile US economy.. The german bonds are a joke. Euros will buy our bonds. Bill Gross said the TLT is the trade of the year. Equities might suffer a tad. but bonds? Hardly a tulip scenario..cheers!