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Bond bubble: a most unhelpful analogy

Bond bubble: a most unhelpful analogy

Financial bubbles have existed for only marginally less time than investment markets themselves. This is because our tendency to get excited and carried away causes them.

There is, however, a serious risk of misusing the term 'bubble'. It metaphorically implies an obvious ending: the bubble bursts. And we all know how that happens: very quickly, and very violently. You simply can't pop a bubble gradually. Physics won't allow it.

But financial markets don't follow the laws of physics, even though they often appear to. There are many complex dynamics at play.

financial markets don't follow the laws of physics

Just because the bond market has risen for over 30 years and is now undeniably overvalued, doesn't mean that its unravelling will be violent. Or indeed that it won't get even more overvalued. Or merely stay at 'overvalued' levels. We live in unprecedented times – both economically and financially.

The inherent demand for income (and therefore bonds) should not be underestimated. People will always need income, and aging populations only exacerbate the situation.

Perhaps we need to start being more thoughtful about bandying around terms like bubble inappropriately. The metaphor won't always apply. And to unthinkingly believe that it will is lazy.