How Scary Is the Bond Market?

I have been thinking about the bond market for a long time.

In 2002, domestic share issues raised 8.9bn, while banks provided twenty times that amount.

The corporate debt market remains tiny.

The euro zone s bond and bill markets would complement but not replace individual states existing government bond markets.

Indeed, the bond market channel is unlikely to boost growth.

Surprisingly, the bond market still seems almost oblivious to this risk.

As the market for these bonds expands, they must be better labeled and certified.

No one should be surprised at what has now happened the private market has essentially disappeared.

Hence, the Fed s intervention in the housing market is really an intervention in the government bond market the purported switch from buying mortgages to buying government bonds is of little significance.

But, compared to other asset classes, the market for NFC bonds is relatively thin.

Nevertheless, the market for Japanese Government Bonds (JGBs) has so far remained stable.

Private sector

He pointed to how the Asian financial crisis in the late 1990 s caused the region s voracious investment demand to collapse, while simultaneously inducing Asian governments to stockpile liquid assets as a hedge against another crisis.

Until there is a market for such bonds, we cannot know what the price will be.

Either way, interest rates would have to fall in order for world bond markets to clear.

A rate hike will come and the bull market will stumble, bond yields will climb and the economy will slip into a recession.

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But in the past two years, other players have entered the market, and volumes have skyrocketed.

So, with the bond market appearing ripe for a dramatic correction, many are wondering whether a crash could drag down markets for other long term assets, such as housing and equities.

And the bond markets will be much more nervous, meaning higher interest payments, which will widen the deficit further.

Japan s public pension funds, which include the world s largest, have dumped local bonds at record rates.

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That is a surprising proposition, given that commodity bonds have an obvious latent market, rooted in real economic fundamentals.

Of course, the discipline of the market is not perfect the bond market does not see implicit future liabilities (like promised pension payments) to any great degree.

What should the private sector do better?

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Instead of denominating a loan to Nigeria in terms of dollars, the Bank would denominate it in terms of the price of oil and lay off its exposure to the world oil price by issuing that same quantity of bonds denominated in oil.

If the Bank lends to multiple oil exporting countries, the market for oil bonds that it creates would be that much larger and more liquid.

Our work with data for the years 1952 1971 showed that the long term bond market back then was pretty easy to describe.

America s Social Security system insulates individuals against the vagaries of the market and inflation, providing a form of insurance that the private market does not offer.

The widening spreads between the interest rate on German eurobonds and some of the other countries euro bonds show that global bond markets take this risk seriously.

The government is now seeking to decontrol domestic interest rates, create a more robust domestic bond market, and finally remove capital controls.

Will the Bond Bubble Burst?

Bond markets are easily lulled.

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But the health care market is not an ordinary market.

A Hacker s Market?

The market is big.

The market is large.

The market is over saturated.

One could emulate J.P. Morgan, whose standard response to questions about stock prices, bond prices, and interest rates was to say simply, The market will fluctuate.