There has been a huge rally in bond yields in the last few weeks. This will make the stimulus plans being initiated by the US Treasury and Federal Reserve more difficult (it will be even worse for other countries with weaker credit, such as Britain.) Perhaps the biggest impact of rising yields will be on the housing market (since mortgage rates will rise.) The corporate sector will also be impacted but so far things look good, with big appetite for junk bonds during the recent rally.
It'll be interesting to see what comes of all this. I personally have no idea if the bond sell-off is simply due to the improving economy (bonds are less attractive if economy is strong) or if it is due to bond investors signalling their displeasure with government policies (and potential for higher inflation.) Bloomberg has an article on the return of the bond vigilantes:
For the first time since another Democrat occupied the White House, investors from Beijing to Zurich are challenging a president’s attempts to revive the economy with record deficit spending. Fifteen years after forcing Bill Clinton to abandon his own stimulus plans, the so-called bond vigilantes are punishing Barack Obama for quadrupling the budget shortfall to $1.85 trillion. By driving up yields on U.S. debt, they are also threatening to derail Federal Reserve Chairman Ben S. Bernanke’s efforts to cut borrowing costs for businesses and consumers.Tags: bonds and credit instruments
The 1.5-percentage-point rise in 10-year Treasury yields this year pushed interest rates on 30-year fixed mortgages to above 5 percent for the first time since before Bernanke announced on March 18 that the central bank would start printing money to buy financial assets. Treasuries have lost 5.1 percent in their worst annual start since Merrill Lynch & Co. began its Treasury Master Index in 1977.
“The bond-market vigilantes are up in arms over the outlook for the federal deficit,” said Edward Yardeni, who coined the term in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds. He now heads Yardeni Research Inc. in Great Neck, New York.