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I don’t know if you heard, but the bond bubble is back.  According to a WSJ article today the risks in bonds are greater than they’ve ever been:

“But even if rates stay low, counter the bond bears, the bubble is getting bigger — and more dangerous. “

Of course, there’s a crucial error in this line of thought.   It is all essentially contingent on one result – rising rates.   The article previously said:

“Now bond bears say the latest rally is setting up the bond market for an even bigger crash once interest rates start to rise.”

I won’t rehash all of the arguments I made at this time last year when I said there was no bond bubble (well before the enormous rally in bonds), but these arguments always miss the same crucial stepping stone – what in the world is going to cause this rate increase?   Describing a bond bubble whose end is dependent on rising rates is a lot like claiming that the world is going to explode tomorrow.  You claim that when the world explodes it will be the end of human existence as we know it.  Of course this is probably true.  If the earth exploded it would be bad news for every living creature on the planet.  But if you fail to explain what causes the explosion then the whole conversation is a moot point.  Likewise, claiming that the bond market is going to collapse when rates rise is a fruitless conversation if you can’t explain exactly why rates will rise….

Thus far, none of the worrywarts appear to understand what might cause rates to surge….And if they understood what would cause it they wouldn’t be nearly so worried about the effects of rising interest rates….

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