NEW YORK — Investors’ raging demand for safe assets over the past six months may have created a bubble in the Treasury market — and some onlookers expect to hear a bursting sound any minute now.
A market bubble exists when asset prices are driven well above their intrinsic value, as occurred with stocks in 1999 and housing prices in many parts of the country in 2006. Often, the end of a bubble is marked by disruptively sharp price declines as investors abruptly conclude assets are overvalued.
There are mixed views about whether the recent buying spree in the Treasury market has driven prices up to unjustified bubble levels. The rally, which has sent bond yields plunging to multiyear lows, was fed first by fallout from the subprime-mortgage crisis and then by growing worries about a recession.
“I’m one who believes there is a bubble. Everyone has been focused on Treasurys because they are afraid of the alternatives,” said Michael Metz, chief investment officer at Oppenheimer & Co. “It has nothing to do with the value of Treasurys, which are overvalued. The stampede has been because of fear.”
Metz expects believes the bubble is likely to give way to much selling soon, particularly for the 10-year note and the 30-year bond.
Furious buying in January sent the 30-year bond’s yield below its 1977 debut level of 4.15 percent to a historic low of 4.13 percent.
The 10-year yield, meanwhile, touched a four-year low of 3.29 percent.
