Portfolio > Alternative Investments

Greenspan: Be Afraid, Bond Bubble Is Bubbling

Your article was successfully shared with the contacts you provided.

Former Fed Chairman Alan Greenspan, whose low interest rate policy contributed to the housing bubble in 2006-2007, told Bloomberg TV on Monday that a bond market bubble is pending.

“If we merely substitute the structure of equity prices [with] … the price of bonds and instead of an expected equity return we have an expected interest rate return that price earnings ratio is an extraordinarily unstable position,” Greenspan told Bloomberg TV anchor Tom Keene.

Greenspan did not say that the Fed should start raising interest rates from its current 0-0.25% range, which it has maintained since December 2008, but he implied the time is near, perhaps already here. Historically the Federal Reserve—and other central banks—raise interest rates in order to take air out market bubbles before they burst.

Referring to the 2008 financial crisis which began when the housing bubble burst, Greenspan said, “I knew something was brewing but I missed the actual date as frankly did everybody else. Something very fundamentally different was going on.”

Greenspan said the optimal interest rate is “a behavioral issue” which reflects human preferences. For example, he said, “Take a look at people standing in line for a new Apple computer a year or so ago … What would they pay for a position farther, closer to delivery date? That is human time preference … [which] is best measured by interest rates.”

He added, “Interest rates going all the way back in human history … have not been significantly different from where we are in the pre-2008 period.”

During that period, housing prices peaked in mid-2006 when the 10-year Treasury yield—the basis for 30-year fixed mortgage rates—was near 5%. Today the 10-year Treasury yield is 2.24%—nine basis points above its level a week ago and almost 20 basis points below its high a month ago.

In a separate public appearance on Monday, Atlanta Fed President Dennis Lockhart told the Atlanta Press Club that “the point of ‘liftoff’ ” for the first Fed rate hike in nine years “ is close.” He explained, “The economy has made great gains and is approaching an acceptable normal … conditions are no longer extraordinary … We are getting closer and closer to what feels like a healed state.”

Lockhart is a voting member of the Fed’s Federal Open Market Committee, which determines interest rates. Since May, he has suggested that a rate hike could come as early as September.

– Related on ThinkAdvisor:

More on this topic