Is rush to bonds creating a bubble?

Economics editor Chris Farrell


BILL RADKE: After all we've been through, you probably don't want to hear that another bubble is growing. But some economists say that's what's happening in the Treasury bond market. Marketplace's economics correspondent Chris Farrell spoke with my colleague Jeremy Hobson about whether the investor rush to the supposed safety of bonds is creating the next bubble.

JEREMY HOBSON: So you think investors are still really nervous?

CHRIS FARRELL: Oh, I think there's no doubt about it. Take a look at U.S. Treasury yields: 10-year bonds -- 2.6 percent, 30-year bonds -- 3.7 percent. Investors around the world are still putting a lot of money into the bluest of the blue chip securities. The full faith in credit of the federal government. And by the way, so much money -- so much money -- is flocking to the U.S. that there's a lot of concern about a bond bubble.

HOBSON: Well is it a bond bubble?

FARRELL: Well, it has some of the classic signs of a bubble. You know, people don't care about yield, they want safety at all costs, there's a mass psychological element at work.

HOBSON: Well obviously this whole bubble debate gets economists excited, but what about you and me, Chris? Should we care if it's a bubble or if it isn't a bubble?

FARRELL: No, I doubt it. You're absolutely right. If you're interested in this debate, go online -- economists are just fighting it out tooth and nail. But for savers, for you and me, here's the thing: Bonds are risky. They are truly risky. I mean, spin out any scenario you want. The fact of the matter is, these interest rates are very low, you're not getting paid much money and at some point this economy is going to start growing. Now when this economy starts growing, a healthy economy will drive up interest rates. If the economy starts growing a little bit, but we have a lot of inflation, that will drive up interest rates. All the risk is that interest rates are going to go up.

HOBSON: But you also said bonds are risky. Where are ordinary people supposed to put their savings? Stocks?

FARRELL: Now let's not go that far. This is your safe buddy. Yes, you're rational. You want to have a little bit of money that you know is going to be there the next year or the next month. So how about short-term Treasury bills? Stick to the short end of the market. When interest rates start climbing, and at some point they will, you'll participate in those higher rates.

HOBSON: OK. Chris Farrell, thank you so much.

FARRELL: Thanks a lot.


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