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Saturday, August 5, 2017

Alan Greenspan warns about the bond bubble!

https://www.cnbc.com/2017/08/04/greenspan-bond-bubble-about-to-break-because-of-abnormally-low-interest-rates.html

Yes, interest rates cannot stay low perpetually and low-interest rates will affect the financial industry especially the banking sector.

The risk-free rate is at 2.26 now and if you factor in the 2% inflation, you are virtually making no income out of buying the 10-year treasury bond.  This lack of money-making opportunity forces investors to seek higher returns in riskier assets and causes bubbles in other assets.

The FED's intention is to increase interest rates gradually so that it will have ammunitions to handle the next recession.  However, when the bond yields start to rise rapidly, the risk-averse investors will flock to bonds and dump riskier assets that they bought previously.  This is why Alan Greenspan said that stock market would crash when the bond bubble burst.

This too-fast-too-furious event is not reflected in the mindsets of ordinary investors yet because VIX is showing great complacency among investors.

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