Tuesday, August 7, 2012

Bubble?

One of the characteristics of a bubble is high, irrational prices of a particular asset. This high price is propped up higher through the belief that it will go even higher.
US 10-year yields are a good example. Unlike what has happened with JGBs, the US Bonds should fall in price because the underlying economy is innovative, dynamic and productive. At a point of time in the medium future, the Fed will stop doing what it has been doing i.e. QE and operation twist.
This should also be accompanied by a simple rally in stock prices because of a better 'risk-reward' scenario there.
With all this money sloshing about, I don't know where else it could go, but I don't see why it would chase sub-3% yields on 10 year bonds backed by a currency that is steadily losing value.

All of this is based on my belief of crowd behaviour.

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