Afternoon Must-Read: Paul Gigot (2009): The Bond Vigilantes

Paul Gigot (2009): The Bond Vigilantes: “The disciplinarians of U.S. policy makers return…

They’re back…. The vigilantes… 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%…. Investors are now calculating the risks of renewed dollar inflation. They have cause to be worried, given Washington’s astonishing bet on fiscal and monetary reflation…. Chinese and other dollar asset holders are nervous. They wonder–as do we–whether the unspoken Beltway strategy is to pay off this debt by inflating away its value…. The Fed is desperate to keep mortgage rates low to reflate the housing market, and last week it promised to inject hundreds of billions of dollars…. This week the bond vigilantes are showing what they think of that offer, bidding up yields even higher. It’s not going too far to say we are watching a showdown between Fed Chairman Ben Bernanke and bond investors, otherwise known as the financial markets. When in doubt, bet on the markets.