“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Federal Reserve chairman, 91, said in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”
While the consensus of Wall Street forecasters is still for low rates to persist, Greenspan isn’t alone in warning they will break higher quickly as the era of global central-bank monetary accommodation ends. Deutsche Bank AG’s Binky Chadha says real Treasury yields sit far below where actual growth levels suggest they should be. Tom Porcelli, chief U.S. economist at RBC Capital Markets, says it’s only a matter of time before inflationary pressures hit the bond market.
“The real problem is that when the bond-market bubble collapses, long-term interest rates will rise,” Greenspan said. “We are moving into a different phase of the economy -- to a stagflation not seen since the 1970s. That is not good for asset prices.”
Central bank balance sheets are at levels that were previously unimaginable and nobody knows what the medium to long-term consequences of that are going to be. Generally speaking central banks either tightening too much, or too quickly, is one of the leading causes of crashes, so there is an increased risk of trouble for the simple reason that we are in unchartered monetary territory.
Global growth is improving which is raising the question of how to withdraw measures that were initially considered emergency provisions but have persisted for nine years and counting. The USA is furthest along in that process so the trajectory of Treasury yields and the total return on bonds will likely be an important arbiter for the wider global bond markets.
The modest pace of wage growth is taking on almost philosophical proportions because it represents the nexus of the deflationary impact of technology with the increasing calls from workers for a better standard of living. A better economy drawing more people back into the workforce might be holding the rate down for the moment but the medium-term consideration is that higher wages incentivise automation. How these themes playout will be an important consideration in when the bond bull market eventually ends.
Right now, 10-year Treasury yields continue to pull back from the 2.4% area and a sustained move above that level will be required to signal a return to supply dominance.