"Bond Vigilantes" Here it Comes!!

Bloomberg News has a piece out this morning titled Bond Vigilantes Confront Obama as Housing Falters.  Now I know that the term "Bond Vigilante" is an old term used with some pride back in the day when the bond market used its power to get presidents and Fed chairman to balance budgets and tamp down inflation.  Now however, I fear that the term "Bond Vigilante" will be used by the White House to create a "Wall Street" vs "Main Street" visual that paints Wall Street as foiling the President's plans to save the economy by "pushing up interest rates".  In fact I think I predicted it yesterday.  You just watch, it will happen real soon.  I can see the Robert Gibbs press conference as clear as day.  Maybe even the President himself!  Can't you just hear it?;

"Now, these Bond Vigilantes on Wall Street....these folks still don't get it.  They don't like the fact that we are trying to clean up the mess that they made through our bold rescue initiatives so they are trying to derail us by pushing up interest rates.  Well, I'm here to tell all you good folks on Main Street that I'm not gonna let them do that.  Not this time!  Thank you and God bless America!"

There are two frightening things here.  The first is I hear these voices in my head all the time!  The next is, I can see the President actually believing what I know he will be saying.  The good thing is the Fed has put a lot of thought into why Treasury rates are rising and they found this (From Bloomberg);

Fed officials see several possible explanations for the rise in yields beyond investor concern about inflation. Among them: The supply of Treasuries for sale exceeds the Fed’s $300 billion purchase program, the economic outlook is improving and investors are selling government debt used as a hedge against mortgage securities.

What a novel concept!  Supply of Treasuries is overwhelming demand, and investors who know that the Fed is committed to keeping mortgage rates down artificially by buying mortgage backed securities are front running the Fed.   As overall rates rise and MBS widen to Treasuries, fast money sells Treasuries and buys MBS and rides the Fed's wave all the way home.  Then they take profits, lather-rinse-repeat.

That's what is happening but that won't make much political red meat for the President. 

Comments

[fletch]

buyer of last resort (taxpayer) losin his ars.. pass the hot potato, it's gettin hotter. only song that comes to my feeble mind, banzai: "I don't want her, you can have her, she's too fat for me"..

[John M]

I am terminally confused about the bond markets. Real experts are even more confused, and I expect Bill Gross' June commentary to be more confused yet. When there are statistics available, they don't seem to make a whole lot of sense. Cenbank holdings of agencies since Dec 31st in particular make less than no sense.

[williambanzai7]

Bailout Economics 101.

There is so much cheap bailout capital sloshing around in the system. How else can you explain what's going on? Markets up despite a constant stream of poor news from housing, increasing foreclosure, increasing unemployment, mega bankruptcies etc. Meanwhile crude is creeping back up as well.

This will be known as the bailout bubble.