Global sovereign debt – the next asset bubble?

While the effects of the great recession are a long way from over, an even greater asset bubble could be forming that would make the housing bubble look like a four year old’s attempt to blow bubble gum. 

Looking forward to a sovereign debt bubble pop?

Sovereign debt, led by US Treasury bonds, has been on a bull market since the early 1980s. Over that period, ten-year yields have fallen from over 15% to around 2.3% presently. 

When the Federal Reserve under Ben Bernanke recently warned investors that a new round of quantitative easing should not be expected on March 9, yields on 10-year Treasuries rose from 2.037% to 2.301%.

After rising 24.19% over the last year, the ProShares Ultra 7-10 Year Treasury (UST, quote) exchange traded fund has fallen 3.43% over the last month of trading.

UBS Investment Bank chief economist Larry Hatheway argues in the Wall Street Journal (Bonds Have Begun Bear Market) that the recent spike in yields for US Treasury bonds ”marks a secular turning point for bond markets. We believe that a long term bear market has commenced.” This is not just in the United States; stimulative measures by the Bank of Japan have greatly weakened the yen too. The ProShares Ultra Yen (YCL, quote) is down about 10% over the last month of trading.

No one can predict in exact terms what the overall consequences and costs of a sovereign debt bubble bursting will be for a major economic power. Based on the example of Greece, it will not be pretty. In a recent interview legendary investor Jim Rogers noted there could come a time when credit could no longer be secured, as we detailed previously in Jim Rogers predicts lost decade ahead.  

This has already happened with the Bank of England (FXB, quote) and the Federal Reserve Bank of the United States. The quantitative easing measures by the Federal Reserve and the Bank of England are powerful statements that no other buyers can be found for the sovereign debt of those two nations at such low interest rates.