Is there a global bonds bubble ‐ what if it bursts?

Abstract

Both real and nominal bond yields have fallen to historically low levels, and in the US the yield curve has been inverted (that is, two‐year yields have been above ten‐year yields) or very flat since the start of December. This article by Jonathan Hoffman and Keith Church discusses the possible reasons for these developments ‐ including the 'savings glut' proposed by the new Fed Chairman Bernanke ‐ as well as the likelihood of a sharp sell‐off of bonds. It then looks at precedents for a sell‐off but concludes that there are few parallels between the current situation and the earlier episodes. Finally, it identifies possible triggers for a sell‐off and presents a simulation with the OEF Global Model to analyse the likely consequences for the world economy. The conclusion is that, while a rise in US yields to 6.5% in the first half of 2007 would cut growth significantly, including through a fall of almost 1% point in the growth rate of household consumption in the US in 2008, its impact would not be catastrophic.