Oct. 13 (Bloomberg) -- Bubble sightings are proliferating by the day, and with interest rates near zero, it’s not hard to understand why. Easy money leads to excess credit creation, which eventually produces inflation in goods and services prices or some type of asset bubble.

Whether these sightings are real or imagined, on the mark or off-base, is another matter.

Current nominees for bubble status include commodities, stocks and bonds: commodities, because a weak dollar stimulates demand for hard assets; stocks, because they’ve come so far so fast and earnings may not justify the prices; and Treasury bonds, because, I imagine, their absolute yields are low.

Those low yields (high prices) represent the antithesis of a bubble. Treasuries manifest none of the bubble zeitgeist. They’re going up in price because of the fear that everything else may go down. And prices are staying up without the support of New-Era prophesies.

Let’s take a look at bonds in the context of typical asset bubbles and see how they stack up.

1. Optimism

Bubbles may be fueled by credit, but they are kept afloat by an overriding sense of optimism about an asset class, the economy or the future in general.

How do bonds measure up on the sentiment scale? Poorly.

No one is buying 10-year Treasuries at a yield of 3.3 percent because the future looks bright. In fact, investors are buying bonds because they aren’t sure stocks and commodities, with their implied rosy outlook, have a lock on the future; because de-leveraging is deflationary in the short run while the Fed’s bloated balance sheet carries future inflation risks; because credit risk is still a concern; because the banks aren’t done with the cycle of writedowns and credit losses now that commercial real estate is facing the same problems as its residential counterpart; and because return of investment is more important than return on investment.

Investors -- dollar-recycling foreign central banks notwithstanding -- are buying bonds because they’re pessimistic, not optimistic.

2. Belief that prices can’t go down

The recently expired housing bubble is a perfect example of the triumph of faith over reason. Soaring home prices in 2005 represented a little “froth,” not a bubble, according to Alan Greenspan, Federal Reserve chairman at the time.

And who could argue with him? House prices had never fallen on a national average basis since the Great Depression. With history on their side, speculators joined homeowners in the free-for-all (free except for the U.S. taxpayer). Home prices increased by leaps and bounds. Bubble accusations were met with reasons why this time is different.

Buying for Losses

Bonds aren’t part of the ever-rising-prices school. If Treasuries are a bubble, they must be the only one where buyers don’t expect huge gains. In fact, it’s just the opposite. Bond buyers know the next big trade is down (yields up). They just aren’t sure about the timing.

Ten-year Treasuries have traded in a post-crisis range of 4 percent to 2 percent and back to 4 percent. Since May, the yield has been slipping, which isn’t a healthy sign. With inflation expectations edging higher -- from close to zero at the start of this year to 1.85 percent now -- the decline in nominal yields is a result of the drop in the real interest rate, or the real cost of borrowing.

Sure, 10-year yields could go back to 2 percent if the stars line up correctly (if stocks test the March lows). Rather than justify the prices, everyone buying the rally will be looking to get out at the first sign of fatigue.

3. New Era

For investors in Internet and technology stocks in the late 1990s, it wasn’t just a New Era they were touting. It was a New Era for a New Economy. Technological innovation related to the Internet was creating boundless opportunities for productivity growth.

Earnings? Not an issue for the New Economy. Concept was everything, with page hits the new metric and return-on-vision the key ratio.

Rising interest rates? Not a problem. Tech start-ups had unlimited access to venture capital. Interest rates didn’t matter. Borrowing was for sissies.

You can’t fool all of the people all of the time, but if enough of them are delusional for a spell, bubbles can continue to inflate.

Yields on Treasury bills may have gone negative in December, but there’s no New Era talk about note and bond yields falling to zero.

The bull market that started in 1981 with bond yields over 15 percent has nowhere to go. One hears a lot more concern about inflation than deflation, which makes sense when the central bank has an over-active printing press.

For Treasuries, then, the upside is limited while the downside potentially huge. If that’s a bubble, just imagine what a bear market looks like.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

Last Updated: October 12, 2009 21:00 EDT