By Greg Robb at Marketwatch
Former Federal Reserve Chairman Alan Greenspan is sounding the alarm about a bubble that he believes is forming in the bond market.
In two television interviews in recent days, Greenspan said interest rates could shoot higher and derail the economy when the bubble bursts.
The former Fed chairman says the current situation in the bond market is comparable to what happens in the stock market during an equity bubble.
Noting that stock-market bubbles are typically characterized by extreme price-to-earnings ratios, Greenspan said extremely low yields are telling a similar tale for bonds.
“If you turn the bond market around and you look at the price of bonds relative to the interest received by those bonds, that looks very much like the usual spread which would concern us if it were equities, and we should be concerned,” Greenspan said in an interview with Fox Business Network.
In an earlier interview with Bloomberg Television, Greenspan said it was appropriate to be very afraid of the bubble. He said the bond market price-to-earnings ratio was at an “extraordinary unstable position.”
Greenspan said “normal” interest rates have always been in the 4% to 5% range.
Yields on the 10-year Treasury TMUBMUSD10Y, -1.61% have been below 4% since the summer of 2008. The yield is up slightly to 2.217% in Wednesday morning’s trade.
U.S. 10 Year Treasury Note
“We have pressed the interest rates well below normal for a protracted period of time and the danger is they will come up to back up to where they have always been,” the former Fed chairman said.
“There are two possibilities. Either we move slowly back to normal, or we do it in a fairly aggressive manner. History tells us it’s the latter which tends to be more prevalent than the former,” Greenspan said.
The market impact will be “not good,” he said.
In an interview with MarketWatch last year, Greenspan said that when bubbles emerge, they take on a life of their own.