Wednesday, May 27, 2009

Bond market vigilantes to the rescue?

Treasury yields are heading skyward, as the bond market begins to realize that a) the economy is improving, b) monetary policy is incredibly expansionary, and c) fiscal policy is creating massive financing needs. This is a perfect storm for the Treasury market, and it could send yields far higher in short order. These forces can easily overwhelm any Fed purchases of Treasuries, and the Fed is foolish if it thinks it can stop yields from rising, as I noted in a prior post.

The silver lining to this thunderstorm cloud is that it may cause our politicians to rethink their plans to spend money like a drunken sailor. It would be great if Obama came to have the same respect for the bond market as Bill Clinton did.


chaim said...


chaim said...

Don't count on the bond market or the sea of red ink to change this administration's deeply engraved ideals that spending is NOT the problem- more revenue is the challenge.

The Washington Post reports that individuals in Congress are seriously considering a 10% VAT and a 25% sales tax. They report that Paul Volker is in support, although he did not speak on the record.

They are apparently also considering additional tax increases on corporations and the "rich".

When Obama recently stated that the huge deficits are unsustainable and that "we have run out of money", he was clearly implying soaking anyone left with any dollars in his/her pocket, and not decreasing spending.

Scott Grannis said...

I share your concerns, obviously. I'm trying to think ahead, though, and it is not impossible that a big bond market selloff could change the political dynamic. If nothing else it draws attention to the enormous deficit, and makes spending much harder to justify.

As for higher taxes, it's been clear for awhile that Obama would be raising them for everyone. That's one reason the stock market is still so cheap.

Public Library said...

This is going to get ugly. Simple logic has left the building. I am not even sure what our Government stands for at this point.

My protector? Car or mortgage loan officer? My slice of the hedge fund industry? Future health care provider? Green energy superstar? Systemic risk regulator? Decider of corporate fate? Redistributors of wealth?

Confusing to say the least. We are entering a new era for sure. A "new normal" means .Gov will be the end all be all.

Scott Grannis said...

Obama has moved so far to the left, and the Democrats have spent so much money, that the odds of failure are very high. They have hoist themselves on their own petard, as they say. They will not be able to contain the damage, and so we will see a political groundswell of revolt and change (for the better).