Friday, May 29, 2009

Bond Vigilantes Are Back With Vengeance

Bond Vigilantes Confront Obama as Housing Falters (Bloomberg)

"For the first time since another Democrat occupied the White House, investors from Beijing to Zurich are challenging a president’s attempts to revive the economy with record deficit spending. Fifteen years after forcing Bill Clinton to abandon his own stimulus plans, the so-called bond vigilantes are punishing Barack Obama for quadrupling the budget shortfall to $1.85 trillion. By driving up yields on U.S. debt, they are also threatening to derail Federal Reserve Chairman Ben S. Bernanke’s efforts to cut borrowing costs for businesses and consumers. "

Who are these "bond vigilantes"?

"The bond vigilantes are being led by international investors, who own about 51 percent of the $6.36 trillion in marketable Treasuries outstanding, up from 35 percent in 2000, according to data compiled by the Treasury. "

"“The vigilante group is different this time around,” said Mark MacQueen, a partner and money manager at Austin, Texas- based Sage Advisory Services Ltd., which oversees $7.5 billion. “It’s major foreign creditors. This whole idea that we need to spend our way out of our problems is being questioned.”"

And what are they doing?

They've been selling the US Treasury notes and bonds, driving the yields up significantly. Compared to the levels in 1990's and early 2000's they are still very low, but 1990's and early 2000's the economy was expanding (last true bull market in stocks, measured by inflation-adjusted S&P500 Index - you can see it in here, and there are lots of other sites).

The charts show the yields of 5-year note, 10-year note, and 30-year bond in the past 9 months. 30-year bond yield is already back to pre-October stock market crash level.

The president of the US doesn't seem to care.

"Obama spokesman Robert Gibbs said the president is confident that his budget and economic plans will cut the deficit and bring down the nation’s debt.

“The president feels very comfortable with the steps that the administration is taking to get our fiscal house in order and understands how important it is for our long-term growth,” Gibbs said."


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