Thoughts about the notion of a "bond market bubble"

What is a "bond market bubble"? Some recent articles (*) have appeared suggesting that we are observing such a thing at the moment. 

I don't think there can be a bubble in the bond markets (in accord with a recent post by Elliot Turner at Seeking Alpha), but the run-up of bond prices seems ominous nevertheless. To identify a bubble, I think we need to find an asset offering sustained unsustainable returns; bonds will not do so. In particular, prices have risen, offering great returns to those who have bought bonds in the past. But the price of a bond is bounded in theory and practice by the restriction that nominal interest rates will never drop below zero; so bond prices will never reach a level that cannot be justified by some rational interpretation of the world. (Literally, the simple sum of promised payments is an upper bound on the price of the bond... or more precisely, only an abject fool would pay more.)

What worries me is not the run-up in Treasuries prices, so much as the run-up of the price of private issues. (See the article on J&J linked below -- how can one lend to any public company at 5% for 30 years!?!) This is flight to quality, surely. But again, I will argue that the corporate debt market itself cannot exhibit a bubble. Rather, that market may facilitate bubbles in other markets.

This is something we have seen before. Earlier in the decade, rates were similarly low, and the money was being funneled into the housing market. Similarly, I think that investors need to watch out for that kind of phenomenon this time around, as well. More precisely, investors need to be conscious of what corporations are doing with that leverage.

(*) Some related articles: "J&J Sells $1.1 Billion of Debt at Record-Low Rates," By Sapna Maheshwari and Tim Catts, Bloomberg, Aug 12, 2010. "Guarding against the Bond Market Bubble," by Andrew Leckey in the Chicago Tribune. Note that most of these do not go so far as to claim that we are experiencing a "bond market bubble".