Bonds Are 'Housing' All Over Again

As German bond yields breach unthinkable levels, BK was struck by a chart from Deutsche Bank – it is a chart of German yields since 1807.


Take a moment to reflect on this chart – in over 200 years, German bond yields have never been lower. This period of time includes such notable and notorious events as:

  • US Civil War
  • The British Railway Mania Bubble
  • The Panic of 1873 and The Long Global Depression
  • Industrial Revolution
  • Thomas Edison’s Invention of Electric Light
  • Invention of the Automobile
  • Stock Market Panic of 1907
  • World War I
  • 1929 Stock Market Crash
  • The Depression of the 1930’s
  • World War II
  • Japan’s Real Estate Bubble and Crash
  • The Dot-Com Bubble
  • 1987 US Stock Market Crash
  • 1997 Asian Currency Crisis
  • 1998 Russian Default and Long Term Capital Management Bailout
  • 9/11
  • The US Housing Bubble and 2008 Great Financial Crisis

During each of these spectacular and horrific events, German bond yields managed to stay in a range of roughly 4-10% with the occasional spike up or down. However during this semi-peaceful economic recovery from the Great Recession, German bond yield have done something they have never done… they have gone negative.

It’s a paradox for sure. The global economy is most certainly stronger than during the 1873 Depression, or the 1930’s Depression, or after 9/11 or even following the 2008 crash… yet yields have never been lower. We are living through a period of economic history that will be the main subject of textbooks for decades to come.

This note is not supposed to be an economic history lesson, this post is meant to be cautionary. The last time we saw an asset class do something it hasn’t done in over 200 years was the US Housing bubble. The following chart was constructed using Robert Shiller’s US Home Price index.


Notice anything familiar? Just like German yields, US home prices remained relatively stable from 1880 to 2001. When interest rates were lowered after 9/11 the price of US Homes skyrocketed to record levels. During the housing bubble people were buying homes in hopes of flipping them to the next fool. Like a game of musical chairs, this fun for a lot of of people… until it wasn’t. When the music stopped, everyone was left without a chair – this included both individuals and institutions like Lehman Brothers. In the end, central bankers had to print money to stop the panic.

This time the the people playing musical chairs are the central banks themselves. So the question is, when the music stops, who bails them out?

BK needs to make one thing very clear – bubbles can continue for a lot longer than most people think. In fact, with US 10 year yields at 1.6% it seems that there is a lot of room for yields to fall. So a bond market bubble bust is unlikely to occur in 2016.

Nonetheless, those buying bonds in this environment (which includes BK) need to be aware that we are buying into one of the greatest financial bubbles of all time. There is money to be made, but one ear MUST be listening for signs that the song is about to end.

Courtesy of TickerDistrict

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