There is a great deal of talk lately about whether we are in a bond bubble or not. The first argument for low bond yields is a risk-based one. Essentially that investors who had mispriced risk in years prior are now looking to atone for their mistakes. However most of that discussion is decidedly free of any sort of quantitative analysis.
Paul Krugman jumps into fray applying some common models to the process and comes to the conclusion that the bond market is correctly pricing in long period of low short-term interest rates. In today’s screencast we ask whether a model can simultaneously be correct but miss the bigger picture?
Posts mentioned in the above screencast:
Whether we are in a for a long period of low interest rates matters a great deal to investors. (Lex)
Why low bond yields may be here for a while. (According to the Taylor Rule and CBO economic projections) how long will Fed funds stay near zero? (Paul Krugman)
Great Mankiw backs up Krugman’s calculations. (Greg Mankiw)
“Bond 36,000 – Professor Krugman defends the bond market” (Eddy Elfenbein)
Daily chart of the yield on the 10-year Treasury note. (StockCharts)