Greenspan issues warning to bond investors before Fed moves

[NEW YORK] Alan Greenspan has a warning for bond investors as the US central bank prepares to raise its benchmark interest rate from close to zero.

"We have a pending bond market bubble," the former Federal Reserve chairman said Monday in an interview on Bloomberg Television. "What ultimately will determine where it goes is to reach back and to ask ourselves where is the normal interest rate?" US 10-year note yields fell three basis points to 2.20 per cent as of 6:36 am in London, according to Bloomberg Bond Trader data. The price of the 2.125 per cent security due in May 2025 rose 9/32, or US$2.81 per US$1,000 face amount, to 99 3/8.

Yields have been anchored by the Fed's policy of keeping its main interest rate close to zero since 2008 to support the US economy.

Ten-year yields are about half their average over the past two decades and are within a percentage point of a record low set in 2012. They will climb to 2.82 per cent by the middle of next year, according to a Bloomberg survey of economists with the most recent forecasts given the heaviest weightings.

Speaking in an interview with Bloomberg "Surveillance" with Tom Keene, Greenspan also said low productivity was one of the major challenges facing the US and other advanced economies. Greenspan was Fed Chairman from 1987 to 2006 and is now a private adviser.

The Fed's benchmark, the target for overnight lending between banks, has averaged 2.73 per cent in the past 20 years.

There's a 48 per cent chance the Fed will raise borrowing costs at its Sept 16-17 meeting, based on the assumption that the benchmark rate will average 0.375 per cent following the increase, data compiled by Bloomberg show.

"When the Fed finally acts, we think rising rates will put pressure on bonds," Bob Doll, a senior portfolio manager at Nuveen investments Inc. in Chicago, wrote in a report Monday. "Investors need to be on the lookout for the possibility of a sharp rise in bond yields." Nuveen had US$233 billion in assets at the end of March, according to its website.

BLOOMBERG