Editor’s Note: There is no doubt the “Bond Vigilantes” are back. At the time of this writing, the 10-year note was at an astonishing 3.71% yield. If you look at the chart of the yield curve on the U.S. Treasury website, you will notice it is steepening at an accelerating rate. Just today it has increased a staggering 21 basis points.
The 10-year interest rate is directly tied to a number of home loans in the United States so any serious increase in this rate is going to bring the so called housing recovery to a halt real soon and we will see defaults on home loans to continue to rise back to the same pace before the massive government stimulus policy began.
At this point, I only see this situation getting worse as the U.S. government is going to be forced to issue a record amount of new debt this year to finance all the bailouts and new programs coming online. This does not end well for the consumer.
News (Wall Street Journal):
They’re back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. 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 to beat the recession.
Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November. Treasury yields had stayed low, and the dollar had remained strong, as long as investors were looking for the safest financial port amid the post-September panic. But as risk aversion subsides, and investors return to corporate bonds and other assets, investors are now calculating the risks of renewed dollar inflation.
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