THE yield on the ten-year Treasury bond fell to 2.13% on August 28th, after North Korea fired a missile over Japanese territory. Investors tend to buy government bonds when they feel risk-averse. That will have come as a surprise to those commentators who have called the bond market a “bubble” that is sure to burst; one British magazine made this a cover story back in September 2001. Every time the ten-year yield falls close to 2%, press references to a bond bubble seem to increase (see chart; the yield is inverted).
It is not just the press. Investors have been cautious about bonds for a while; the vast preponderance of fund managers polled by Bank of America Merrill Lynch in January had a smaller holding than usual in the asset class, just as they did in January 2016. But while inflation stays subdued, and central banks maintain short-term rates at historically low levels, government bonds seem able to attract buyers. Japan’s government bond yields have been very low since the start of the millennium; those betting on a crash in the Japanese market have lost money so often that the trade became known as the “widowmaker”. If the US bond market is a bubble, it has taken a long time popping.