It’s been really busy as of late to cover all of the topics I have wanted to address. One topic, in particular, is the bond market and the ongoing concerns of a “bond bubble” due to historically low interest rates in the U.S. and, by direct consequence, historically high bond prices.

Bob Bryan, via Business Insider, recently penned the following note:

“Bond yields are low. Historically low. Yields on government bonds in the US, Europe, Japan, and beyond are at seriously depressed levels. Even corporate bonds are reaching multi-decade lows as more investors pour into the asset class.

While the serious flows into these debt instruments continue seemingly unabated, Scott Colyer, CEO, and CIO at Advisors Asset Management thinks that the continued support for the asset makes no sense stating:

‘Bond prices are the highest they’ve ever been, yields are the lowest they’ve ever been and we go back to 1776, this is such an anomaly it’s not even funny.'”

While many financial analysts, asset managers and the media have been quick to adopt the idea of a “bond bubble,”there are a few things to consider with respect to this concept. As I have discussed previously, we are currently in the midst of the third stock market bubble since the turn of the century, but a bubble in bonds is a bit of a different animal.

As always, it is important to remember the problem with bubbles is that they can last far longer, and rise further, than most would generally think possible.

Throughout history, every bubble has been driven by a couple of common factors: excess liquidity, “a new era” mentality and speculative frenzy. Each time the bubble is formed it is believed that “this time is different” for one reason or another. The slide below was from a presentation that I did in March of 2008 when I was calling for the bursting of the equity market bubble at that time. No one believed me then because the markets were still surging higher as the belief was the economy had entered into a “Goldilocks” scenario.

farrell-bubbles-091116

The last bubble was driven by a speculative frenzy in real estate and debt which was spurred by loose lending standards, a collusion between banks and Wall Street (due to the repeal of Glass-Steagall), and the conversion of real estate into an ATM via mortgage equity withdrawals. As we all now know, despite repeated calls by Ben Bernanke everything was “contained,” it all ended very badly.