The former Federal Reserve Chairman sees it this way:
“The United States, strangely enough, as badly as we are doing – is still the best of the worst. Nobody is doing well… And that still doesn’t make us any better.”
Greenspan is not the only high profile person to voice concern over the bond market. Billionaire investor Carl Icahn has joined the growing number of voices warning about the bubble that’s brewing:
“I think the high-yield market is in a bubble. I think that is a no-brainer. This thing is going to go over this cliff.”
Over $42.7 billion has entered the bond market thus far in 2015, up massively from last year’s total for the year of $43.5 billion.
But this rampant buying seems to be slowing down, and cracks in the bond market are beginning to appear, with an exodus already underway in recent weeks.
In the second week of June, $2.9 billion was pulled out of the bond market. The following week, a whopping $4.1 billion was taken out.
Even if the Federal Reserve were to try to stave off the day of reckoning that Greenspan and Icahn predict by keeping rates low and buying more debt through QE4, this would only be a temporary ‘fix’.
The free market would at some point overpower any manipulation put on it from the central planners – as the free market always does.
Bonds are beginning to be sold, with many countries seeing negative yields – meaning that some people are buying bonds with the guarantee of losing money over their duration.
This is considered to be the ‘new normal’ in places like Europe, according to Goldman Sachs.
Of course, this tactic spectacularly fails the first rule of investing according to Warren Buffet, who is famously quoted as saying, “Rule No. 1: never lose money; rule No. 2: don’t forget rule No. 1″.
That should sound off some alarm bells about the current state of the bond market.
Here’s the other problem: With interest rates near zero percent, and with the Fed likely out of bullets, a rate hike in the future seems likely. Once rates do begin to increase, the value of bonds will likely fall and investors would flee the bond market.
With so much of Americans’ retirement savings in bonds – especially the savings of those who are close to retirement – the potential risk is enormous.