The big bad bond vigilantes are back and they’re going to bring higher yields, crushing borrowing costs and economic panic with them [end sarcasm]! At least that’s what some commentators are saying now that 10 year bond yields have risen a whopping 50 bps. According to Barrons the bond vigilantes have awoken from their slumber:
“Bond yield have shot up in almost unprecedented fashion since the Federal Reserve announced its plan to purchase $600 billion of Treasury securities two weeks ago—precisely the opposite effect the monetary authorities intended from QE2, the second phase of its quantitative easing.
From a low of 2.48% on Nov. 4, the day after the announcement of launch of QE2 by the Fed, the 10-year note yield began to rise and then shot up in the past week, to a peak of 2.96% Monday, amid a barrage of withering criticism that was largely political in nature.”
Of course, if we look at the reality of the situation we’ve merely seen a correction back to the pre-QE2 hysteria levels. Bond investors were excessively optimistic about the ability of the Fed to control the long end of the curve. So, we saw yields tank in August and September only to recover back to their proper levels once it was realized that QE2 was a great big non-event. My guess is that yields will remain well below historical levels in the coming quarters. If the housing double dip becomes strained we could very well see yields reaching new lows. But make no mistake, that will not be due to QE2. It will be entirely due to the Fed’s failure to overcome disinflation and ultimately deflation….
This morning’s CPI data along with several other inflation reports shows that inflation remains non-existent. This is still a disinflationary environment and a 10 year treasury at 3% is clearly reflective of that. The 50 bps correction is nothing more than the bond market righting itself after the QE2 hysteria. It does not reflect some existence of “bond vigilantes”. And it certainly does not reflect higher future borrowing costs for the USA.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.