Thursday, November 11, 2010

Is it a Bubble if a Reversal is Already Priced into the Market?

Below is a chart of the 10 year Treasury yield and what the market is pricing in for the 10 year yield, ten years forward (along with the five year average of each).



What we see is that the current yield is well below the five year average (bringing up concerns there is a "bond bubble"), but we can also clearly see that the market is already pricing in the yield to rise to a level that is higher than its five year average in ten years.

If a reversion from these lows is already priced in (past its five year average), I don't see how we are in a bubble (i.e. "bubbles" are not supposed to be priced into the market).

Source: Federal Reserve