In various parts of the globe, negative interest rates have become standard fare, but Republican congressman and former presidential candidate Ron Paul said this scenario could cause the bursting of a “bond bubble.”
Inverted yield curves in Treasury notes, a typical warning sign of a forthcoming recession, have already put the markets on alert and even thoughts of negative rates in the U.S. are starting to creep into fixed income vernacular.
“We will join the rest of them and go to total negative rates in hopes that that will be the solution,” Paul told CNBC’s “Futures Now” on Thursday. “We’ve never had as many currencies in negative interest rates. $17 trillion worth of bonds [are]in negative interest rates. It’s never existed before. And, that’s a bubble. So, we’re in the biggest bond bubble in history, and it’s going to burst.”
The Federal Reserve recently implemented another quarter-point rate cut, but Paul believes this will do nothing to ease the markets from fretting further.
“You can’t predict exactly where the creation of credit goes,” said Paul. “We have a ton of inflation with all that QE [quantitative easing]. And, every time you lower interest rates below market levels and create new credit, that’s a bubble.”
Paul has previously warned that a mega-decline of 50% would hit the stock market, so his views on anguish in the capital markets are nothing new. Over a year ago, he cited the accumulation of debt via overspending by the government would result in a bubble.
“I see trouble ahead, and it originates with too much debt, too much spending,” Paul said.
“The Congress spending and the Federal Reserve manipulation of monetary policy and interest rates — debt is too big, the current account is in bad shape, foreign debt is bad and it’s not going to change,” he added.
When exactly will this bond bubble burst?
“You don’t know this precise time. But you know it can happen,” he said. “How do you sell a bond that pays a negative rate? Who’s going to jump up and down?”
Nonetheless, Paul says history supports his view.
“It can be pretty well validated by looking at monetary history that when you inflate the currency, distort interest rates and live beyond your means and spend too much, there has to be an adjustment,” Paul told “Futures Now” last October. “We have the biggest bubble in the history of mankind.”
Smart Beta Fixed Income Options
Treasury yields continued their free fall, which is spooking investors with an inverted yield curve–a recession indicator. As such, it’s forcing bond investors to take a closer look at smart beta when it comes to yield-hunting in fixed income markets, but also creating innovation in the bond markets.
Smart beta options include the Invesco Multi-Factor Defensive Core Fixed Income ETF (CBOE: IMFD) and the Invesco Multi-Factor Income ETF (CBOE: IMFI) are recent additions to the issuer’s lineup of multi-factor bond ETFs. Both new ETFs track in-house indexes.
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