Monday, August 16, 2010

The Bond Vigilantes Are Coming

Nobody could have predicted that the Masters of the Universe are always wrong about everything.

As 2010 began, there was nearly unanimous agreement in financial circles on at least one thing: Interest rates were sure to rise during the year.


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The governments are seeking ways to bring down budget deficits, fearing that without austerity they could go so far into debt that they would never be able to borrow again. Investors in the financial markets seem to be much more concerned by the possibility of renewed recession and a general deflation that could send asset values and prices down.

That market reaction is the opposite of what happened in the late 1970s and early 1980s. Then “bond vigilantes” were reluctant to invest in United States Treasury securities because they feared runaway inflation. Their refusal drove up the interest rates the government had to pay on its borrowings and eventually led the Federal Reserve, under Paul A. Volcker, to wage war against inflation even if it meant choking off economic growth.

10-Year Treasury is currently at 2.59%.