Observers have been warning about the dangers of a bond bubble and what a collapse in such a huge market would mean. Recently, The Economist and many other mainstream publications have become more strident in expressing their prognostications and concerns. See this article from the Asia Times for an example.
Artificially low interest rates (aka free money) coupled with stimulus funds recklessly sloshing to and fro have inflated asset prices all over the globe. However, the most dangerous of these runups is likely the U.S. bond market. Banks, governments, agencies and investors have been borrowing short at close to zero percent interest and buying long bonds yielding 4 %. Just for good measure, anytime the bond market looked a little unsteady, the federal reserve steps in and buys a whole bunch. Sounds like bootstrapping, doesn't it? Anyway, this will need to be unwound sooner or later, just like any other market that has been driven up artificially (like the housing bubble in the U.S., sub-prime, etc.)
The big difference is that the U.S. bond market is very close to the top of the pyramid as far as the world monetary and financial systems are concerned. A failure in this market could crash the U.S. dollar, the world's reserve currency, in addition to crashing government financing capability and markets generally. If you think the sub-prime mess was bad, it would be a walk in the park compared to where a bond crash would take us.
While governments have been been frantically trying to defuse our crisis, they are really playing double or nothing and risking everything, including the very foundations of our financial and economic structures. Heaven help us all.
More here.
