BIS Sees Bond Bubble Bursting

The bond market is a bubble and is about to burst. That’s the conclusion of a new report published by the “mother of all banks”, the Swiss based Bank of International Settlements, as reported by Obviously, the burst of the bond bubble has potentially catastrophic effects, comparable to a 2008 crash, as it is “the largest liquidity pool on the planet.”

We have reported numerous time in the recent past about the growing bubble in the bond market. In an earlier article, we wrote about the bond bubble that is ready to burst and the gold bubble ready to inflate, about the folly of the bond and paper market.

The article on explains perfectly the current market anomaly. This is they key part in our view:

The bond bubble is perverse indeed, contrary to the laws of economics. Increased risk ought to be met with higher, not lower borrowing costs. Savers therefore feel forced to pursue higher yields by buying lower quality debt such as the bonds of near bankrupt nations as if the risk of such bankruptcy had gone away.

Yet the central banks continue to print money by buying bonds to keep interest rates low. It is bizarre again that the banks of the world are deleveraging and cutting back on loans at a time when the bond markets continue to offer capital for almost nothing. A credit bubble is what a bond market bubble is called.

In the meantime, the expected changes in the banking sector via the Basel III Agreement from BIS have been delayed, as reported by Reuters today. The Agreement prescribed higher capital reserves, in order to make banks less vulnerable to a 2008-alike crisis. The proposal included also the “upgrade” of gold from a risk asset (tier III) to a zero-risk asset (tier I, just like cash). The expectations are that the agreement will be delayed to the first of January 2014.

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