I've been thinking about the idea of a “bond bubble” recently. It's a topic that's been bandied about by a few pundits over the past year as rates dropped to historically low levels.

However, I believe one requirement of a bubble is that the vast majority of investors have jumped on board. Most investors hopped aboard the internet bubble and most of those same people rode the real estate bubble, as well. During their heights, they were all people could talk about.

I don't think there is nearly that same interest in long-term bonds right now. They certainly weren't a part of any dinner party conversation I overheard at the holiday parties I attended. It is very interesting to think about the potential for a bond bubble, though. 

If we are, in fact, in the midst of a deleveraging cycle that is to last many more years as the natural reaction to these bubbles it is very plausible that interest rates would continue to decline. If households continue to eschew debt for savings the demand for interest-bearing instruments will continue to increase. Lenders will begin to compete for waning demand for credit by lowering the cost of borrowing. The Fed will also have to maintain its zero-interest-rate policy because of lackluster consumer demand. All these forces combined would be a powerful force for lower interest rates/higher bond prices.

It's not happening just yet, as some pundits would have us believe. But I can imagine the dinner party where guests are one-upping each other with tales of trading the long bond.

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