The Looming Bubble in Long-Term Debt

by Mark Tiberius

In the aftermath of the financial crisis of 2007–2009, analysts and prognosticators have constantly argued over the next big bubble. Will it be in auto loans, in equities, government bonds, or even in housing again? However, the biggest risk facing financial markets may be the financial asset duration bubble. Since 2009, large institutions including central banks, sovereign wealth funds, pension funds, and insurance companies have acquired longer-dated assets to achieve needed returns on yield. Years of monetary policy stimulus from the world’s major central banks has suppressed interest rates worldwide to all-time lows. While this may be viewed as a stimulating policy for borrowers, it creates serious issues for financial institutions with required levels of investment returns and with future liabilities.

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