Alan Greenspan warns of 'irrational exuberance' in bonds

Last Friday on CNBC,  former Fed Chairman Alan Greenspan said that it's fair to characterize the current bond bubble as an "irrational exuberance" type of forecast. He did hedge the statement by saying that he has "no time frame on the forecast." Also note that he started making this bond bubble call in 2015.

The reference to "irrational exuberance" goes back to remarks that he delivered at a 1996 American Enterprise Institute dinner. The Tokyo market was open during the speech and immediately moved down sharply after his comment and closed down 3%. Markets around the world followed. While his comments rattled markets, the technology bubble continued on for another 4 years after his speech.

 Greenspan believes that the prolonged period of low interest rates is about to end.

"The current level of interest rates is abnormally low and there's only one direction in which they can go, and when they start they will be rather rapid."

Ironically the central bankers have likely inflated the bond market bubble themselves. It is the Fed that took its benchmark rate to near during the financial crisis and kept them at artificially low levels for over seven years. In addition the Fed went to the open market and purchased trillions of dollars in bond purchasing programs to keep long rates low. Today the Fed's balance sheet is $4.5 trillion and is expected to slowly start to unwind its holdings starting in September.

While we don't expect a sharp rise in rates, it is a possibility. If rates did rise suddenly, it would likely put pressure on the stock market. This is a risk that we monitor very closely and we would act quickly for our clients if needed.

Greenspan: Perfectly fair to say there's 'irrational exuberance' in bond market from CNBC.

Are you worried about the bond market? Do you think it's a bubble?

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"Alan Greenspan 2" by trackrecord is licensed under CC BY-NC-ND 2.0

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About the Author: Chris Wang

Chris Wang


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