There are many asset bubbles out there but they won’t burst until central banks raise interest rates at least three times, according to a Financial Times report on a Citi analyst note.
“Rate hikes eventually burst bubbles, but it usually takes at least three. We think it is still too early to fight this bull market,” the FT reported the note as saying.
The most notable bubble is in European government bonds, which came back strongly after Greece’s debt deal last month.
They are expensive relative to historic prices, especially Italian (BTP) and French (OAT) bonds, which are almost beyond the bubble levels seen in Japan before the 1990’s stagnation.
Here’s the chart:
The US stock market it also making its way into bubble territory, according to the note, once underperforming banks and financial firms are stripped out.
US stocks bubble:
Markets are bracing for the US and UK central banks to raise rates, after a six-year stretch of near-zero interest rates inflated assets from real estate to stocks and bonds.
But the gradual pace of the increases are unlikely to pop the bubbles anytime soon.
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