Pragmatic Capitalism

Practical Views on Money, Finance & Life


I see some chatter in different circles about rising interest rates and how the bond vigilantes are just one step away from throwing the US economy into the dumpster because our debt situation is becoming increasingly “unsustainable”.  It’s all nonsense.  First of all, I want to put the recent rise in yields into perspective.  I’ve taken the 30 year bond yield and blown up an image of the recent rise in rates.  My trusty computer magnifying glass can barely see the ferocity with which the bond vigilantes are attacking our bond market (see figure 1 below).

Of course, the truth is that the USA is an autonomous issuer of its own currency.  That means it can never “run out” of money (see here if you’re getting confused already).  This is very different than what’s going on in Europe where each country is analogous to a state in the USA and a currency user.  The difference is critical when understanding the economy and the markets.  Because there is no solvency risk in the USA the bond markets are almost entirely controlled by the Fed (private credit markets are different).  That’s right.  James Carville was wrong – when you come back you want to come back as the Federal Reserve, not the bond market!   Of course, we could print so much money (since we can’t run out of money we can certainly issue too much of it!) that inflation becomes wildly out of control and our currency collapses to nothing and causes the US to become a third world country, but that’s a very different phenomenon than the USA becoming Greece who can literally run out of Euro….

In short, the bond vigilantes aren’t coming.  The thought of bond vigilantes existing in the USA is like believing there’s a boogeyman underneath your bed.  If rates rise it will be because the economy strengthens or inflation gets uncomfortably high (a scenario which will likely accompany stronger economic growth OR a spike in oil prices which will likely be followed promptly by recession).  Either way, don’t fear the bond vigilantes.  As I’ve said since the beginning of the year, bonds are overpriced and yields are likely to move higher from here, but that’s not because of mythical bond vigilantes.  It’s just the natural cyclicality of the market and the Fed letting the dog leash out a little bit.  If rates rise too much the Fed will yank that dog back into place.  And if the recovery becomes a boom then the Fed will likely raise rates forecasting to the bond market that they can take the leash out a little further….

(Figure 1 – those vicious bond vigilantes!)

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services.He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.
Cullen Roche

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