"They're back," a Wall Street Journal editorial proclaims.
"They" are bond traders, referred to as "bond vigilantes" in the 1990s. They received that moniker because with their actions, they demanded that the government implement fiscal responsibility.
As soon as bond traders saw the budget deficit rise, they would dump Treasuries, pushing interest rates higher. And, no politician wants to run for re-election when rates are rising.
"The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars," the Journal editorial points out.
Treasury yields and mortgage rates hit their highest levels since November on Wednesday, May 27. And, the spread between two- and 10-year Treasuries climbed to a record peak of 275 basis points.
"As risk aversion subsides, and investors return to corporate bonds and other assets, investors are now calculating the risks of renewed dollar inflation," the editorial points out.
Loose fiscal and monetary policy has bond traders concerned. "They have cause to be worried, given Washington's astonishing bet on fiscal and monetary reflation," the Journal editorial argues.
As for fiscal policy, "The Obama Administration's epic spending spree means the Treasury will have to float trillions of dollars in new debt in the next two or three years," the Journal states.
"Meanwhile, the Fed has gone beyond cutting rates to directly purchasing such financial assets as mortgage-backed securities, as well as directly monetizing federal debt by buying Treasuries."
Others agree with the Journal's asssessment about the bond market’s renewed primacy.
“For me, the government bond markets, and specifically the U.S. long bond, are the key to what happens in other markets during the remainder of the year,” writes Paul Amery, managing editor of IndexUniverse.eu.
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