Hi, I’m Jimmy in this video. We’re gonna be looking at what many people are calling one of the largest bubbles ever. They’re calling it the bond bubble. So our question is, how did this happen and what are some potential ways that this whole thing could end? Okay. Now, I’m sure we’ve all seen headlines like this, and I’m sure that most of us know the way that bond pricing works. But just so we’re all on the same page when the price of bond goes up. Well, the yield of that bond goes down. And the same is true the other way around. When yields go up, the price of the bond goes down. And this happens because generally the interest paid on a bond stays the same no matter what the current interest rate is out in the market. So if we have a five dollar coupon payment, sometimes they call this the interest payment. Well, if the coupon payment is five dollars on a yearly basis and let’s say we pay 100 dollars for that bond. Well, clearly, if we take the five and we divide it by hundred, we get a five percent yield. So now we own this bond and supply and demand of the market takes over the bond pricing. And for some reason, a whole bunch of people begin to sell the bond and the price falls. Maybe it falls all the way down to ninety dollars a share. Well, at the same time, the coupon continues to pay five dollars per year. So now we have a dividend yield of slightly over five and a half percent. And here’s where it gets interesting. So now what? Just like what’s happening in reality today, the Federal Reserve starts lowering interest rates. And yes, our coupon is already set. So we know we have to worry about that changing on us. But even if the Fed lowers rates, it does. It’s not going to affect our individual coupon because we already own this bond, but it very much does affect the value of the bond itself. And here’s why. So investors generally like higher yield and ideally they like less risk. So now Treasuries, which the Fed is, is what the Fed is trying to influence when they adjust rates. Well, treasuries, in theory, are the invest the asset class that have the least amount of risk in them. Maybe they were paying, let’s say, two and a half percent and now they’re down to one point seventy five percent. So some investors are simply going to need a higher yield than that. So they go out searching for yield and maybe this bond is one of the bonds that interested in. So a bunch of buyers come in and buy, start buying this bond. And sure enough, because they have more buyers and sellers, the price begins to rise. And as we know, as the price rises, while the yield falls, let’s pretend the price jumps all the way to one hundred twenty dollars. Well, now the yield is about four point one seven percent, all the way down from 5 percent when the bond was selling at one hundred dollars. So now we may be asking, where’s the bubble? And this can actually be a heated debate among investors. So for that, let’s switch over to this chart. This is a chart of the 10 year U.S. Treasury bond going all the way back to the early 90s. So clearly rates have been falling over the past few decades. Well, at some point, they’re going to have to rise. Well, what happens to bond prices when you start rising rates? In fact, if we zoom in a bit just to the past year, what with interest rates below 2 percent. Well, what would happen if bond rates rose up to, let’s say, just two and a half percent? That half a percent increase from the current level is more than 25 percent higher. Now, clearly, this would be a bad thing for bond prices. And it seems that this is a theory. Rates have fallen way too much. And because of that, so much debt has been taking out. And as that has happened, we know that at some point rates are going to have to rise. What happens when they begin to rise and you have an enormous bond bubble? Now, this may be true and that may be exactly what happens. But perhaps we should consider some alternatives. So the first alternative to consider is when interest rates rise. What if they go up, but they go up slowly? And if this if they do go up slowly, does the bond bubble still pop? The answer may be yes. Now, here’s a chart of the 10 year Treasury going back just the past five years. And clearly, from the middle of 2016 to just recently, well, bond rates were rising and the bond bubble didn’t pop back then. Now, clearly, a case can be made and it’s probably a viable one that rates didn’t go up enough to cause the bond bubble to pop. Well, at this time, they only rose from about one point three or one point four percent to a bit over 3 percent. Sure, that’s more than double, but it’s still less than a 2 percent increase. So maybe that wasn’t enough to cause the bond bubble to actually pop. Now, it’s actually leads us into scenario two for the bond bubble in general. What if rates don’t rise for a long time now, I’ve heard a lot of economists say that rates are at historic lows and they simply have to go up. And this is true. Rates are at historic lows and there is a historic amount of debt. And if we go around the globe. Well, much of the world is sitting at negative interest rates right now. To illustrate, here’s a quick example. And let me know if you see any similarities between what happened in this example and what happened in the U.S.. So it’s the 1980s in Japan and the economy was booming. Real estate prices were taking off all over the country and much of the Japanese population found themselves doing quite well and spending accordingly. Well, then moving it to 1990, prices of real estate began to show early signs, early warning signs. And in 1991, real estate prices begin to collapse. At the same time, the Japanese stock market begins to class. And just like that, Japan entered what is known today as the lost decade. Now, granted, it could be argued that the Bank of Japan took too long to react and to start lowering interest rates. And perhaps that’s part of the reason why the U.S., when the U.S. ran into the very same issues, was so aggressive with loaning reduce interest rates after the Great Recession. But this is a chart of Japan’s 10 year treasury bond going back to 1991. And as we may notice today, interest rates are negative on the Japanese 10 year treasury bond. Now, if we would add the U.S. 10 year treasury to this, what we can see some very similar. There are some similarities here. Now, I’m not bringing this out because Japan’s interest rate bonds is what the example the world is after. They’re just an example of where a lot of the world is at. Let’s add Germany to this as an example. How about the U.K.? Well, as we could see, most 10 year treasury, most developed countries look very similar to this. And as the Japan chart illustrates, Japan dropped below 2 percent right in this area. And they stayed there when they dropped below 2 percent for in 1998. Well, they stayed there for almost 20 years. And that’s still it’s still there today. So this raises the question, if rates are going to rise, when are they going to rise? Japan has been able to stay there for a long, long time. The U.S. just recently, just over the past few years, crossed below the twenty, the 2 percent mark. So when does it begin to rise as if five years, now, 10 years, 20 years it could be. Now, this brings us to our final point. Now we’re at a very unusual point in history. We’re in unchartered waters because right now it’s estimated that there is 19 trillion dollars, about 19 trillion dollars in debt that is tied to bonds that currently have negative interest rates. So if we were to buy a bond today that had a negative interest rate, well, we’re almost certainly guaranteeing that we will lose money as that bond matures. So what some economists are saying is that what’s likely to happen is investors are faced with this scenario is that they’re going to sell their bonds and either hold cash or perhaps move to stocks or real estate or some other investment. The point is they sell their bonds. What happens if everybody starts selling their bonds all at once? Once again, the bond bubble pops. So the prices begin to tumble and panic begins. So is this what’s going to happen? It could be. And like I said, the world has never seen anything like this before. These are unchartered waters. And I firmly believe that a serious misstep by one of the world’s major economies could cause a ripple effect around the globe. If that were to happen, who knows where it would go? But even knowing that, I also know that the Federal Reserve or the ECB or the Bank of Japan or whoever it is, could keep rates low or at least raise them in a gradual fashion. It’s possible. Like we pointed out with the Japan example, that it stays there for a long time. If they do. Does the bond bubble really pop? Because we can’t forget that bonds are not the same as stocks, because bonds have a maturity date. Bonds expire. Most bonds have a fixed term there. Their time period will end on a predetermined date. So as we know in our example, well, we own the bond. Let’s pretend that this is a bond of a company and let’s pretend it’s a Microsoft bond that we bought, let’s say two years ago. And that bond paid a coupon rate of four point to five percent. Well, this bond doesn’t expire till 2047. Well, let’s imagine that right now this bond is trading one hundred twenty four dollars because a lot of investors want bonds of good companies. So let’s imagine that interest rates start rising and everybody begins to sell this bond. So when they do, for some reason, we don’t sell. We continue to hold this bond and the price of this bond falls all the way down to ninety dollars or even eighty dollars. Well, we we don’t have to sell. So we decide not to. Now if this were a stock, we’d be down the same 20 dollars and maybe we were willing to eat that loss because we don’t know when the falling will stop and we don’t know if we’ll ever get our money back. But with bonds, we do know well, we’re at least more confident. We know with this bond. It ends in 2047. And we know at that point we’re going to get our principal back. And in the meantime, we get to collect our semiannual interest payments of five dollars per year. So we don’t have to sell. We can simply sit here, hold our bond until it expires. And as long as Microsoft say it stays a solvent company, we can virtually guarantee ourselves a profit on this whole trade. A small one, sure, but a profit nonetheless. So I bring up this last part here, because I just want to point out the difference between a potential bond bubble and what a stock bubble could look like. There’s going to be some buyers that don’t feel the urgency to flee out of the bond market as easily as some feel flee out of the stock market. So those are a few examples of some scenarios that I see that could prevent a bond bubble from bursting. Of course, option four to this whole thing is that the bond bubble actually does burst. And that would actually be scary because there’s a ton of money in the bond market, way more money in the bond market than there is in the stock market. But what do you think? Do you think that the bond bubble is going to burst? Do you think there even is a bond bubble? Or will the world just keep going? Moves to the major developed economies continue to move along as they have been. Do you think they will continue to do that? Is there a limited downside because it’s the bond market like in our Microsoft example, or does the whole thing just go pop? Please let me know what you think in the comments below. If you haven’t done so yet, please hit the subscribe button. Hit the thumbs up. Thank you so much for stick with me all the way into the video. Please post your comments below because I’m really curious to see them. I’m really curious to hear what everybody’s opinion is on this. Thanks so much for stick with me all the way into the video. I really do appreciate it. I’ll see in the next video. Thanks.