http://www.ibtimes.com/articles/181119/20110716/bond-vigilantes-budget-deficit-interest-rates-bond-market.htm
i smell a rat when it comes to this term Bond Vigilantes , they are just smart investors that are not drinking the koolaid anymore.... But the story is still the truth that we the US of A are next...
It's as if the Democrats and Republicans in Washington aren't watching events in Europe related to Greece.
i smell a rat when it comes to this term Bond Vigilantes , they are just smart investors that are not drinking the koolaid anymore.... But the story is still the truth that we the US of A are next...
It's as if the Democrats and Republicans in Washington aren't watching events in Europe related to Greece.
Institutional investors (II) have already imposed a 'risk premium' on Greece - they've increased the interest rate that Greece has to pay to borrow money in credit markets for short-term debt, and have effectively locked-out the country from borrowing long-term -- the interest rate is too high.
Greece this week borrowed €1.625 billion or $2.28 billion at 4.96 percent in an auction of 26-week treasury bills.
However, had Greece sought to borrow for 10 years, it would have had to pay a 17 percent interest rate!
In contrast, Germany can obtain 10-year loans for 2.69 percent; Italy for 5.76 percent, Spain for 6.06 percent.
Why is this important for the United States and for American taxpayer?
Presently, the U.S. Government can borrow money for 10 years at about 4.2 percent. Up to now, institutional investors have been patient regarding the nation's effort to decrease, then eliminate, its large budget deficit, which the Congressional Budget Office estimates will total $1.16 trillion in fiscal 2012, the current fiscal year.
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However that II patience could change, in a hurry.
The bond vigilantes among the institutional investor camp could, for any number of reasons, suddenly decide that U.S. Treasury bills -- up to now the safest bond investment in the world and one of safest investments overall -- aren't the best place to park their money.
Economist Ed Yardeni, who now runs Yardeni Research Inc. of Great Neck, N.Y., coined the term 'bond vigilante' in the 1980s to describe the institutional investor practice of selling bonds and shorting bonds of governments when they see unsustainable fiscal policies and/or other actions by governments or companies that the institutional investors believe will lower the value of the bonds issued.
The bond vigilantes could decide that Washington is not serious about deficit reduction, long-term, and that the U.S. will continue to run plus-$800 billion deficits through the end of the decade.
At that point 'the discount' or reduced interest rate that investors charge the U.S. Government would end, the bond vigilantes would be dominant, and U.S. interest rates would move higher.
Translation: If the bond vigilantes attack, the U.S. Government's cost of servicing its debt would soar, perhaps to levels that are too high, assuming current funding levels of government commitments, such as national defense, Social Security, Medicare, senior citizen prescriptions, and Medicaid.
As a result, Congressional officials would then be left with the difficult choices of: 1) a massive cut in spending or 2) a massive increase in taxes. Or an onerous combination.
And, needless to add, if the bond vigilantes attack, the dollar, already pummeled by a decade of deficit spending in 2001-2008, would take another hit, reducing the value of dollar denominated investments.
Hence, it goes without saying that it's time for Democrats and Republicans in Washington to quit the posturing and pass a substantive, enduring deficit reduction package - one that cuts the deficit long-term, and that includes a tax increase as well as large spending cuts. The bond vigilantes are watching.
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