The greatest bull market in the history of markets just keeps on chugging as long-term bond yields continue their perpetual slide. As of this morning the yield on the 10 year T-Bond is 1.35%.
This is a bit confusing for some people because the US economy seems to be in relatively good shape. Q2 GDP is expected to print at 2.4%, wages are growing at 3.4%, the ISM non-manufacturing number just came in at 56.5, jobless claims are at 40 year lows. Yeah, there are some worrisome trends out there as well, but the broader picture doesn’t seem to mesh with such low interest rates.
Of course, if we step back and look a the global picture then it all starts to make a bit more sense. The US bond market is stuck in a global vortex of 0% rates. Thanks to weak growth in China, Europe and Japan global central banks have cut rates in an effort to spur growth. This leaves savers earning virtually nothing on their cash in a weak environment in which longer rates also don’t yield much. And on a relative basis, the USA looks like a high yield safe haven. Which is why foreigners are piling into US Treasury bonds exacerbating the rate decline.
What’s so interesting about this is that US markets appear relatively buoyant when compared to foreign markets. The S&P is just shy of its all-time high and the purchase only index for US real estate prices is at an all-time high. And a big part of that is due to the relative economic strength combined with the low yields which has forced investors into other assets.
What’s even more interesting is that this environment appears (at least in my view) to be ripe for a financial asset bubble. That is, as weakness abroad drives yields lower in the USA this makes stocks and real estate look increasingly attractive. Stocks have clearly benefited from this “reach for yield” as have certain types of higher risk bonds. But we haven’t seen the big boom in real estate yet (with the exception of maybe San Francisco). But could we be there? I am not certain, but here in Southern California the chatter is starting to get a little crazy again. As rents rise rapidly and future returns on stocks and bonds just don’t look that great, many people are turning to real estate. The other day I was talking to one of the most rational and intelligent guys I have ever known. I was talking about all of this and how absurdly low mortgage rates are. He said, “yes, that’s why you buy a house in today’s market and then go out and buy another one”. Now, this is an Ivy League econ PhD talking here, not your average stripper circa 2006.
When rational people start saying irrational things my ears perk up. And it makes me wonder (still) if we’re not on the precipice of something that looks a lot more like 1999 than 2008. Add it all together and it makes you wonder – are we ripe for a big financial market bubble thanks in large part to foreign economic weakness? It might seem paradoxical, but don’t discount that risk….