Things make sense till they don't...

For too long now I've been sounding the bond bubble warning signal. However, of late, while I'm still avoiding bonds, I've begun to back off that stance just a bit. Not because the burst to be felt round the world has yet to happen, but because so many people are now sounding that same signal. You see it's typically not the things you expect to upset the apple cart that upset the apple cart. I recall---after the bursting of the residential real estate balloon---many a pundit was calling for a collapse in commercial that would make the residential experience seem little more than bubble gum on your cheek. Not that the commercial market didn't experience its own pain, but it didn't, after all, turn the Great Recession into the next Great Depression. And what about the European debt crisis? Everybody and his au pair was (many still are) predicting an '08 style (or worse) global equity market meltdown as nations, beginning with Greece, would domino out of the union. Could still happen, but ????

A CNBC article this morning (and a few other recent commentaries/analyses), however, has me back to thinking that the serious global threat of the mother of all bond bubbles bursting is still very much on the table: Three analysts from Moody's cite recent issuance levels and spreads between investment grade, junk and treasuries to be at historically sound levels. They therefore see no strong evidence that a "damaging correction" is on its way. I find their position dangerously sanguine for two reasons: One, citing their credit spread assessments, in an historical context, at a time of historically low interest rates (uncharted waters) as a reason to sleep easy, is historically dangerous. As evidenced by my number two: The great historian Ben Bernanke made the following similar call on the mortgage market back in March of 2007 (OOPS!):

The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.

Yep, things make sense till they stop making sense.

Stay tuned...