Bond Market Bubble?

April 29, 2014

Interest rates may rise soon, says Andrew Flowers, a former employee at the Federal Reserve Bank of Atlanta.

There is an emerging call from central bankers that the Federal Reserve should raise interest rates. Today's low interest rates have encouraged a large amount of borrowing, and economists are worried that borrowers are making risky bets and reaching high levels of indebtedness. There could be a bubble, these analysts say, in the bond market.

The U.S. bond market is worth a total of $40 trillion -- much higher than the $28 trillion stock market. Jeremy Stein, a member of the Fed's Open Market Committee, has pointed to three signs that indicate bond market bubble:

  • Private sector debt is rising. Today, nonfinancial companies have borrowed to such an extent that their debt level equates to more than 55 percent of gross domestic product.
  • Lenders are loaning money at extremely low interest rates, indicating that they are not accurately pricing the risk of default from those companies.
  • More and more corporate debt is going to risky companies. The number of junk bonds issued today has risen to above pre-financial crisis levels.

The Federal Reserve, Flowers says, may become convinced that interest rates need to rise in order to meet this bubble threat.

Source: Andrew Flowers, "The Potential Bubble the Federal Reserve Cares Most About," Five Thirty Eight, April 21, 2014.

 

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