Stephen Roach: “Rates can go to unusually low levels for much longer than people think”
With the global economy in recession and inflation headed toward zero, government bonds are looking like the best place to put one’s money. As a result, we have seen yields on these assets drop to incredibly low levels in the world’s largest developed economies as their prices have increased.
I am on record for expecting this rally in government bonds to continue due to the economic environment despite having labeled Treasuries a bubble. Stephen Roach agrees with that assessment, which brings me to his quote:
“Rates can go to unusually low levels for much longer than people think.”
That is exactly my point regarding Treasury securities. They may show all the hallmarks of a bubble. But does that mean that the bubble will end now? That did not happen after Greenspan’s irrational exuberance quip in 1996. It didn’t happen in 2004 and 2005 when the Federal Reserve and the Bank of England were looking to stem the tide of residential property price bubbles.
Certainly there are those like Marc Faber who think Treasuries will tank.
“It’s hard to believe that after blowing up so many bubbles over the past couple years, the Fed is managing to blow yet another bubble,” he says.
“Thirty-year Treasury bonds are yielding about 2.5 percent. You would have to assume that over the next 30 years there will be no inflation problem” to make those yields attractive.
Given the expansionary fiscal and monetary policy of the United States, “there will be a time when inflation accelerates along with a weak dollar,” Faber says.
“When that happens, central banks will have to increases interest rates, which will be difficult to implement.”
You should notice that Roach and Faber have similar views on the direction of the global economy over the next five to ten years, but drastically different views as to what this means for government bonds.
While I have my money on a rise in Treasury bonds, this is not a sure thing by any stretch. If the Federal Reserve reflates the U.S. (and the global economy) through massive stimulus, you can be sure that Treasuries will be in for a very nasty correction.