The Return Of The Bond Vigilantes, by Doug Kass

The bond vigilantes can’t prevent governments from borrowing, but they can make it more painful for them. From Doug Kass at Seabreeze Partners via zerohedge.com:

  • With mounting private and public debt, the U.S. economy is poorly positioned to reach consensus economic growth expectations
  • The Bond Vigilantes are saddled up and ready to make a comeback – and it’s market unfriendly

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” 
– James Carville

In “The Great Bond Massacre” from late 1993 to late 1994, the yield on the US ten year note rose from 5.2% to 8.0% as investors grew fearful about the implications of large federal spending increases.

For the first time in years the bond vigilantes, “a self-appointed group of citizens – the bond vigilantes – who undertake law enforcement in their community without legal authority, typically because the legal agencies are thought to be inadequate” have surfaced – with the ten year U.S. note yield now approaching three percent.

This morning the yield on the ten year U.S. note has hit a new four year high of 2.99%.

As I see, though rates still appear low by historic standards – the sizable climb in debt loads (in both the private and public sectors) and the continued fiscal profligacy – will likely exacerbate the impact on the recent rise in yields by providing a governor to economic growth and by stirring a number of other adverse outcomes:

Ballooning Deficits and A Large Supply of Treasuries Loom: A $1.2 trillion 2018 U.S. deficit (and borrowing requirement) coupled with $600 billion of the Fed’s Quantitative Tightening means that there will be, according to David Stockman’s most visual phrase, “the bond pits will be flooded with $1.8 trillion of ‘homeless’ government paper.” Never in the history of modern finance has a near decade old domestic economic recovery faced a financing hurdle that represents almost nine percent of GDP. How large is this hurdle relative to history? At the top of the last U.S. economic expansion, the Federal Deficit was 87% lower (at $160 billion) – which represented only one percent of U.S. GDP at a time that the Fed was still buying Treasuries (in 2007 the Fed purchased $15 billion of Treasuries) and not selling them (or letting them rollover without replacing). So, this time around, the flow of Treasuries will represent supply that is nine times larger (relative to GDP) than was the case in 2007.

To continue reading: The Return Of The Bond Vigilantes

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One response to “The Return Of The Bond Vigilantes, by Doug Kass

  1. Yeah where were these jokers for the last 16 years? LOL.

    Like

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