The so-called bond vigilantes may be back, 30 years after they
led a sell-off in Treasury securities over the prospect of higher government
spending by a new Democratic administration.
اضافة اعلان
The Federal Reserve has downplayed the risk of inflation, and
many experts discount the danger of a sustained rise in prices. But there is an
intense debate underway on Wall Street about the prospects for higher inflation
and rising interest rates.
Yields on 10-year Treasury notes have risen sharply in recent
weeks, a sign that traders are taking the inflation threat more seriously. If
the trend continues, it will put bond investors on a collision course with the
Biden administration, which recently won passage of a $1.9 trillion stimulus
bill and wants to spend trillions more on infrastructure, education and other
programs.
The potential confrontation made some market veterans recall the
1990s, when yields on Treasury securities lurched higher as the Clinton
administration considered plans to increase spending. As a result, officials
soon turned to deficit reduction as a priority.
Ed Yardeni, an independent economist, coined the term bond
vigilante in the 1980s to describe investors who sell bonds amid signs that
fiscal deficits are getting out of hand, especially if central bankers and
others do not act as a counterweight.
As bond prices fall and yields rise, borrowing becomes more
expensive, which can force lawmakers to spend less.
“They seem to mount up and form a posse every time inflation is
making a comeback,” Yardeni said. “Clearly, they’re back in the US So while
it’s fine for the Fed to argue inflation will be transitory, the bond
vigilantes won’t believe it till they see it.”
Yields on the 10-year Treasury note hit 1.75 percent before
falling back, a sharp rise from less than 1 percent at the start of the year.
Not all the sellers necessarily oppose more government spending;
some are simply acting on a belief that yields will move higher as economic
activity picks up or jumping on a popular trade. But the effect is the same,
pushing yields higher as prices for bonds fall.
Yields remain incredibly low by historical standards and even
recent trading. Two years ago, the 10-year Treasury paid 2.5 percent ; many
bond investors would happily welcome a return to those yields given that a
government note bought today pays a relative pittance in interest. And during
the Clinton administration, yields on 10-year Treasurys rose to 8 percent, from
5.2 percent between October 1993 and November 1994.
Still, Yardeni believes the bond market is saying something
policymakers today ought to pay attention to.
“The ultimate goal of the bond vigilante is to be heard, and
they are blowing the whistle,” he said. “It could come back to bite Biden’s
plans.”
Yet evidence of inflation remains elusive. Consumer prices,
excluding the volatile food and energy sectors, have been tame, as have wages.
And even before the pandemic, unemployment plumbed lows not seen in decades
without stoking inflation.
Indeed, the bond vigilantes remain outliers. Even many
economists at financial firms who expect faster growth as a result of the
stimulus package are not ready to predict inflation’s return.
“The inflation dynamic is not the same as it was in the past,”
said Carl Tannenbaum, chief economist at Northern Trust in Chicago. “Globalization,
technology and e-commerce all make it harder for firms to increase prices.”
What’s more, with more than 9 million jobs lost in the past year
and an unemployment rate of 6.2 percent, it would seem there is plenty of slack
in the economy.
That is how Alan Blinder, a Princeton economist who was an
economic adviser to President Bill Clinton and is a former top Fed official,
sees it. Even if inflation goes up slightly, Blinder believes the Fed’s target
for inflation, set at 2 percent, is appropriate.
“Bond traders are an excitable lot, and they go to extremes,” he
said. “If they are true to form, they will overreact.”
Indeed, there have been rumors of the bond vigilantes’ return
before, as in 2009 as the economy began to creep out of the deep hole of the
last recession and rates inched higher. But in the ensuing decade, both yields
and inflation remained muted. If anything, deflation was a greater concern than
rising prices.
It is not just bond traders who are concerned. Some of Blinder’s
colleagues from the Clinton administration are warning that the conventional
economic wisdom has not fully accepted the possibility of higher rates or an
uptick in prices.
Robert Rubin, Clinton’s second Treasury secretary, echoed that
concern but took pains to support the stimulus package.
“There is a deep uncertainty,” Rubin said in an interview. “We
needed this relief bill, and it served a lot of useful purposes. But we now
have an enormous amount of stimulus, and the risks of inflation have increased
materially.”
While most policymakers expect faster growth, falling
unemployment and a rise in inflation to above 2 percent, they nonetheless
expect short-term rates to stay near zero through 2023.
But the Fed’s ability to control longer-term rates is more
limited, said Steven Rattner, a veteran Wall Street banker and former New York
Times reporter who served in the Obama administration.
“At some point, if this economy takes off bigger than any one of
us expect, the Fed will have to raise rates, but it’s not this year’s issue and
probably not next year’s issue,” he said. “But we are in uncharted waters, and
we are to some extent playing with fire.”
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