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Okay, admittedly, the title is purposely provocative. Depending on how you define “bond vigilante”, and what government bond market you're talking about, they actually very much do exist. But the way many people are defining them with respect to the United States, they really never did exist. So talk of a return of the bond vigilantes because of a brief increase in 10-year yields above 2% is a bit hysterical, to say the least.

Participants in the US Treasuries market care about one thing: inflation. For non-US national economies that do not have a sovereign unpegged currency, this concern may include risk of repayment (like Greece, Spain, Argentina). But for the US Treasury market, have no fear, because there never really have been any bond vigilantes to "punish" the US for running large deficits, just rational participants responding to growth and inflation expectations (expected inflation -> sell bonds, resulting in higher market yields).

In general, government bonds serve the purpose of providing a safe, guaranteed stream of income in a currency, and have historically been used by investors as the bare compensation to catch up with inflation. In times of higher inflation, investors demand higher returns on Treasuries (and the Fed accommodates this by fighting higher inflation with higher short-term rates, to entice investors to park their money to cool down growth). In times of lower inflation, Treasuries have a very low return, reflecting slow growth, and consequently, very little price pressure (which the Fed also accommodates with lower short-term rates that push investors out of the unattractive safe returns into other assets).

Defining the Bond Vigilante

To start, this discussion is nothing new, and it's picking up steam from the likes of Cullen Roche at Pragmatic Capitalism as well as Matthew Yglesias at Slate. But I just wanted to expound on this by analyzing the time period where the term “bond vigilante” really solidified its place in the financial press' lexicon, and even in the vernacular.

Let's establish a basic definition. Most people would look at Wikipedia perhaps as a valid authority on this, which defines the term as:

“A bond vigilante is a bond market investor who protests monetary or fiscal policies they consider inflationary by selling bonds, thus increasing yields”

Protests? Don't traders trade to...well, make money, right? Not to make political statements...

But, this isn't as bad of a definition or discussion about bond vigilantes as you'll find, for example, at the metal-crazy Austrian (Austerian?) sites talking about default risk in the United States:

“The bankers’ credit fueled a 300-year global expansion which transformed the world. The bankers’ credit, however, has now become debt which increasingly cannot be repaid….”
Cannot be repaid! Wow, well we know that's not true, there's no risk of repayment for a monetary sovereign, but there's still the risk of inflation.

So we're getting closer to a definition that works more generally, let's settle on this one from “Invesco Perpetual”:

“Investors in bonds who pay particular attention to policies that could be deemed to be inflationary or increase default risk. Inflation erodes the value of capital and interest payments on bonds, since these tend to be fixed. Therefore, higher inflation will tend to push bond prices lower.”
Now we're getting somewhere. This definition is worldwide, as there are certain nations that are in fact constrained in their production of the national currency, either because of a peg in the case of numerous economies in Latin America and Asia, or because of simply adopting an entirely different currency as their own, such as Ecuador or Greece. In reality, these are just participants in the bond market that are rationally managing their portfolios in response to alternative incentives, not punishing politicians for debt levels per se.

Are there really American Bond Vigilantes?

In the United States, there is no default risk, save for incredibly stupid politicians who don't quite understand the monetary system.  But going back to the Wikipedia definition, this is the kind of thing that is driving the misunderstanding behind what “bond vigilantes” do. They're not “protesting” possible inflation, they're merely rational market participants who are analyzing monetary and fiscal policy, as well as social trends, to guage the risk of inflation, and inflation occurs in the face of growth.

If there is expected future growth, why would anyone want to hold on to government bonds that give traditionally lower, yet safer returns. There would clearly be better opportunities in private bonds, or private equities, or just general economic projects that would have higher yields. So this has nothing to do with “protests” to chastise policymakers over high spending that could fuel inflation, and absolutely nothing to do with high spending that would lead to an unsustainable debt burden that would fuel default risk as a possibility. Instead, they are merely market analysts who are chasing yields.

Potential growth, leading to potential inflation, leading to better yields in non-bond markets, are what lead investors to sell Treasuries to invest in other projects. Additionally, the Federal Reserve controls the short-term rates on debt, and if they don't see the inflation, and don't raise rates to attempt to counter inflation, then the bond markets tend not to react. In this sense, markets follow the Fed's lead, which follows the data that comes out, which is all about one thing: inflation. The Fed will not raise rates (or theoretically should not) unless there is a risk of inflation that requires a "cooling down" of growth.

The market participants understand this, but the American people don't. The root of this problem is bad journalism, and thus inadequate informing of the public.

Case in point is when so-called journalists like Robert J. Samuelson (who unfortunately shares the surname of one of the greatest economists in history) push bad analysis of bond markets and fiscal policy, such as this:

"I was arguing that today’s highly indebted governments have less leeway to adopt massive 'Keynesian' stimulus programs of spending increases or tax cuts without triggering a backlash from bond markets — higher interest rates that undermine the stimulus. I still believe that’s true; the evidence is Greece, Ireland, Portugal, Spain and Italy."
So we have American journalists telling Americans that they are like nations that don't have their own currency, and thus hysteria over debt levels, despite a calm bond market, is warranted as if we were Greece (and it's worth noting every example he used was a Eurozone nation trapped in a currency they had no real control over). And we're told that the bond market vigilantes that have rightfully sold off peripheral Eurozone debt, leading to higher yields, are the same creatures that will attack the United States' bond market, despite a fiat currency without any hard constraints. This is wrong, so very wrong.

But in American history since the removal of the gold peg, do we really see any true acts of “bond vigilantism”? Are market participants historically really chastising policymakers for deficits and risks of inflation that don't materialize? Do they really sell off bonds in protest, without having a different opportunity that gives them motivation to sell?

Click below for an analysis of the supposed bond vigilantes in the Clinton era, where I point out that not only were the economists at the time (and still today) confused and downright wrong about what drove the Treasury market during that time, but they infected the psyche of people ever since then to misunderstand the phenomenon as one driven by debt load, not inflation risk.

Analysis of Clinton-era So-called Attack of the Bond Vigilantes

Digging into the history of the use of this term, it seems to be mentioned retroactively to refer to the high Treasury rates of the 70's and 80's. But this was a time of actual inflation, driven by a supply shock of a key input (oil). The bond market reflected that inflation, the inflation didn't come about because of the yields in the Treasury market.

However, the term really came into public use during the Clinton years in late 1993, when 10-year Treasury yields jumped. We get interesting explanations as to why this occurred, but to get the prevailing “wisdom of the market” regarding this issue, here's what Ronald McKinnon in an op/ed piece for the Wall Street Journal wrote:

“For example, in 1993 when the Clinton administration introduced new legislation to greatly expand health care without properly funding it ("HillaryCare"), long-term interest rates began to rise. The 10-year rate on U.S. Treasury bonds touched 8% in 1994. The consequent threat of a credit crunch in the business sector, and higher mortgage rates for prospective home buyers, generated enough political opposition so that the Clinton administration stopped trying to get HillaryCare through the Congress.”
Let that sink in for a minute. It seems unfunded bills for spending were seen to be the main motivation for the selloff, according to what is supposed to be a credible economist from Stanford, Ronald McKinnon.

I thought that was a bit of an odd claim. Considering that by memory I knew that inflation wasn't a major concern back then, and the idea that proposed legislation would spur inflation risks seemed odd and rather unfounded.  So I dug into the general macroeconomic data in the surrounding years:

10-year Treasury yields and Effective Federal Funds Rate

Figure 1: 10-year Treasury yields and Effective Federal Funds Rate

In Figure 1 above, we can see the true ascent of the 10-year yields began basically in the beginning of 1994, well after the legislation was proposed by Clinton in 1993. It's also well-known just how unlikely this legislation was at the time, the famous “Harry and Louise” commercial had done its job to propagandize Americans into thinking this was just a bad idea to cover everyone's for healthcare services. In other words, this was not a credible threat to high spending which would fuel inflation, or high spending that would fuel “unsustainable debts.”

Even well after the bill was declared dead by Senate Majority Leader George in mid-1994, the 10-year Treasury yields continued to climb into 1995. Clearly we can determine that the legislation regarding Hillarycare was not really the driver of rates, despite the claims of a supposedly esteemed academic economist. On the contrary, in Figure 1 you can also see that the increase in the Federal Reserve's federal funds rate preceded the increase in yields in the 10-year Treasury (which was flat through the end of 1993 and early 1994). Coincidence?

Core CPI and GDP YoY

Figure 2: Core CPI and GDP growth YoY

Furthermore, we can look at the core inflation rate (Figure 2, the bottom line) and clearly see that inflation was comfortable around 3%, a very stable level that is around the equilibrium that economists like to talk about so much (but has little to no empirical backing). In fact, it had been on a slow decline for over a year at that point, certainly no reason for the central bank to raise rates to prevent inflation. It stands to reason that if inflation numbers were increasing, then a rational central bank would then react by raising rates to end the trend, but this was not the case at all.

We can then eliminate raw inflation numbers as being the driver of higher rates, what about GDP? The green line in the graph shows that GDP in the late 1993 and through 1994 was going up rather quickly. This could potentially have been seen as a warning sign of future inflation, and thus given bond market participants a reason to sell off Treasuries to go into other securities that may offer better rates of return. Considering inflation was low while GDP was growing quickly, that may have been a concern on the minds of traders, but unlikely to spur such a change in the Treasury market.

Finally, let's take a look at the blue line in Figure 1, representing the effective federal funds rate that the Federal Reserve sets that is essentially the wholesale cost of funding for banks. It begins increasing in 1994, a decision consciously made by Greenspan's Fed at the time. One can clearly see that this increase in the short-term funds rate precedes the increase in 10-year Treasuries. Could it be that the Treasury market participants were merely reacting to Fed policy of increasing rates on short-term bonds? Greenspan sent clear market signals that he and the entire Federal Reserve Board were concerned about future inflation. The logical market reaction is to demand higher rates on safe assets to compensate for this risk.

This seems the most likely reason for the increase in 10-year Treasury yields, since all the other data pointed to low inflation and the market didn't seem to show any other signs of expecting higher inflation.

So far, no sign of any bond vigilantes, just evidence of perhaps an irresponsible Federal Reserve raising short-term rates because of a fear of possible (but never materialized) inflation due to higher GDP numbers being posted. And higher rates set by the Fed would make any marketeer respond with a demand for higher Treasury rates to compensate for a perception of higher inflation in the future -- if the Fed says it's a risk, well you have to respond to it whether it's credible or not!

Greenspan's Federal Reserve Policy during Alleged Attack of Bond Vigilantes

I decided to investigate further by checking out the Federal Open Market Committee minutes from February, 1994, to figure out what exactly these guys were thinking by raising rates. Sure enough, they were concerned about “price pressures” (inflation) and “sustained economic growth” (GDP that is controlled rather than left to spike upward unsustainably):

“In the implementation of policy for the immediate future, the Committee seeks to increase slightly the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly lesser reserve restraint might be acceptable in the intermeeting period. “
There's no reference in the minutes whatsoever to expected government programs that would lead to higher inflation, and there's certainly no indication that they are responding to bond market rates going up, but here is something they do reference:
“Most market interest rates declined slightly during the intermeeting period, and major indexes of stock prices posted new highs. Market participants saw the incoming news on inflation as encouraging; still, they viewed the economy as relatively robust, and on balance they deemed a firming of monetary policy to counteract a potential buildup of inflation pressures as likely in the next few months, but probably not in the very near term.”
In other words, the Fed was worried about too much private growth that was perhaps viewed as unsustainable, which may lead to upward price action pressure. Not one single mention of the Fed trying to front-run the bond market, or even a single reference to any concern by any of the Board governors. Instead, they're merely talking about how robust private growth could lead to higher prices. So rational bond market participants would then sell bonds in reaction to the apparent consensus that inflation was going to be a problem, which is exactly what happened.

However, inflation at the time was posting numbers below 3%, and back in 1993 they were closer to 4%, so why was inflation a concern in 1994, but not in 1993? The answer is the trend in GDP growth, not any government actions that were merely proposed, not any risk of repayment, not any risk of instability due to perceived inability to repay, and certainly not the result of some bizarre protest in the government bond market.

It could be (and I'll expand on this in a later essay) that Greenspan mismanaged the economy as he had so many times in his long reign at the Fed, and raised rates prematurely, provoking fear of inflation that wasn't that risky after all, given the statistics that were out at the time regarding a slow labor market, low inflation, but high GDP growth. It's these rate increases and talks of high inflation which actually provoked the 10-year Treasury selloff, not a protest against high debt levels or high government spending which would lead to run-away inflation.


Bond market vigilantes do not engage in market transactions as a form of protest. There is little evidence to support this idea, save for perhaps a few stragglers who don't have any real influence in markets anyway claiming they participated in such activities as a protest.

Instead, market participants do what they do to position themselves for what economic conditions are reflecting now and as expected in the future. The Federal Reserve in late 1993 and early 1994 was openly discussing inflation pressures and high growth that needed to be dampened, raising discount and federal funds rates to achieve the goal of stabilizing growth. However, Core CPI was reflecting a continuing downtrend in inflation, rather than any true risk of higher inflation being realized (just higher bond rates).

It seems then that the obvious factors leading to the “attack of the bond vigilantes” were in fact Federal Reserve actions to raise short-term rates to dampen accelerating GDP figures, as well as their open discussions of a risk of future inflation that didn't seem to be a credible threat in hindsight. There was no real attack to punish Washington, but merely a reaction to Fed policy.

In light of all this, it's extremely irrational for individuals to even imply that bondholders are going around selling off Treasuries absent any data indicating higher growth/inflation,as a means to protest policymakers' decisions. It's patently absurd to insist that, in an economic environment where advance GDP just came out at -0.1% annualized for the 4th quarter of 2012, the key Fed rates are all around 0%, and core CPI under 1% consistently on an annual basis, the Treasury investors would sell off their holdings in fear of inflation or overheated growth. There's no basis for this fear given the Fed's current actions and the economic data.

Such discussions serve more to push the hidden agenda politically of those who advocate such risk of attack, namely to dice up any social spending and roll back New Deal progress with austerity touted as the only cure to...stagnantion and near deflation? Er, I mean, crushing deficits and debt! Then again, Democrats are using the same fear tactics, but to promote different cuts. Austerity is unfortunately a bi-partisan Washington consensus.

It's important for the public to know that we won't be running out of dollars and that unstable inflation levels may be a risk (although there's no current indication of that) in some situations, but only really when growth is high and real resources are in a capacity squeeze. Treasury bond rates will not go up until we have growth and inflation that justifies it, as well as corresponding Fed actions on the short end of the yield curve to push it through. We are not in any way beholden to the whims of "bond market vigilantes." The market participants merely react to the data surrounding inflation and growth, particularly any and all of the Federal Reserve's actions (from overt rate changes to signaling policy intent to influence market expectations). They certainly do not get upset about higher government debt levels and "punish" the Treasury market with a sell-off.

In summation, the real driver of higher Treasury bond rates is the Federal Reserve's control of short-term rates, as well as the power of their suggestion of inflation and other risks that lie within their publications, which have such a high influence on bond market participants. In this regard: we have nothing to fear, but the Fed itself.

Originally posted to AusteritySucks on Mon Feb 04, 2013 at 05:09 AM PST.

Also republished by Money and Public Purpose and Community Spotlight.

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Comment Preferences

  •  Great diary (8+ / 0-)

    I love data-driven diaries that explain complex issues with clear, lucid prose.  Thank you for this!

    Any sufficiently advanced technology is indistinguishable from magic. -- Arthur C. Clarke

    by mathGuyNTulsa on Mon Feb 04, 2013 at 05:52:36 AM PST

  •  agreed (3+ / 0-)

    btw, have you seen your 401k statement lately?

    mine for the past four years is a 45 degree line to the top!

    15% return for last year.

    -You want to change the system, run for office.

    by Deep Texan on Mon Feb 04, 2013 at 08:04:52 AM PST

  •  Yep. People don't usually engage in stock or (4+ / 0-)
    Recommended by:
    kck, MPociask, LilithGardener, aguadito

    bond market transactions to send a message.

    •  well, yeah, they do. (3+ / 0-)
      Recommended by:
      aguadito, llywrch, Calgacus

      "People don't usually engage in stock or bond market transactions to send a message."

      the message is, "i want to increase my ROI."

      i cannot read a samuelson column all the way through. the man is, and has been since i first noticed him in the wp, a blithering financial idiot. no surprise, he has exactly zero background in finance, economics or accounting, which raises then the obvious question: how did he get his gig to begin with?

      greenspan, long an ayn rand acolyte, finally admitted that everything he thought he knew was wrong. unfortunately for us, he waited until he was just about to retire, before making that announcement. in the meantime, he was responsible for multiple bad decisions by the fed, the ripple effects of which were felt around the world. fortunately, other, smarter people, who couldn't figure out what the hell greenspan was talking about, looked at the actual facts on the ground, and were able to apply just enough brakes, to keep him from being the total economic disaster he was so diligently working on being. when you're getting your cues from an actual crystal ball, and discredited political/economic theory, you probably shouldn't be in charge of the fed.

      •  I'm guessing it's his name alone (0+ / 0-)

        Lots of people -- like me -- have heard of Samuelson the economist. (A friend of mine, who read his textbook for his economics class, thought the economist was overrated, which is why I always treated the journalist's column with skepticism.) So they assumed the guy writing the columns was the same person.

        Just one more reason not to read this pundit.

        •  You're not the first to make that mistake... (1+ / 0-)
          Recommended by:

          ...that's why I slipped in that note about him unfortunately sharing the surname of one of the greats, because i've seen so many people falsely assume that Samuelson the pseudo journalist douche was the same as PAUL SAMUELSON, who I think rightfully deserves to be referred to as one of the greatest economists in history, certainly one of the greats of the 20th century in America.

          Pass the word on to your friends, it's a dangerous assumption! Because Paul Samuelson would NEVER say the shit that this clown gets away with.

          One note though: John Taylor (known for the "Taylor rule" for analyzing optimal Fed policy) actually is a somewhat okay economist who tends to put out dopey right-wing papers. Wouldn't call him one of the greats, but tha'ts one actual economist you should be wary of in his newer work.

          •  I'd pass the word on except for one problem -- (0+ / 0-)

            I don't know anyone who reads his column.

            That includes me, FWIW. I'll glance at his opening paragraph, then if I'm curious I'll read until I get annoyed with him & move on to another part of my local paper.

            My local paper is simply full of batshit crazy syndicated columnists. About the only ones I make an effort to read on a regular are Paul Krugman, E.J. Dionne & Leonard Pitts. And my local paper stopped carrying Pitts' article for a while -- for reasons I can only suspect. (But it did decide to carry the forgettable ramblings of a college student every other week. Either he says the right things, or he has embarrassing pictures of the top guy at the paper.)

  •  Great diary. (2+ / 0-)
    Recommended by:
    LilithGardener, aguadito

    You are exactly right!  Hope this diary gets wide distribution.

  •  Heck (5+ / 0-)
    Recommended by:
    oldhippie, aguadito, MKinTN, Sparhawk, Odysseus

    ... I'm not even sure the Treasury market exists anymore (as in a reasonably efficient/free market). The Fed is the main player and moves rates wherever they want them to go. They may allow a little room up and down, but they have the resources (unlimited) to make the market do what they want (they with the $3 trillion + balance sheet). (Note a 2% 10 year when inflation expectations are above that implies a free and efficient market, I think not).

    The more important question has not to do with bond vigilantes, but instead when if ever will there be a reasonably working Treasury/bond market again???

    Capitalism and markets use interest rates (the price of money) as a key indicator in investment decisions. The current massive distortions mean that any "recovery" we see is definitely suspect.

    There's room at the top they're telling you still But first you must learn how to smile as you kill If you want to be like the folks on the hill

    by taonow on Mon Feb 04, 2013 at 09:27:50 AM PST

  •  Thank you for this educational diary about (1+ / 0-)
    Recommended by:


    I have a simple question, (which you may be elementary for experienced bond investors).

    What do you think accounts for the short-term spikes in the Effective Federal Funds rate, when the yield moves as much as 1.5% and then returns to the baseline (or overshoots)?

    In the chart you show the biggest example is the move at 1994-07, when the yield spiked up about 1.8% and the reaction was a drop down by about 2.1%.

    On the other side, for example, when I look at the sharp drop in late Dec 1995, I think I understand the sharp drop to reflect either a "flight to safety" or rebalancing at the end of the year.

    But I don't know how to think about the very short-term spikes and returns to baseline. Might it be anticipation of a Fed move that failed to happen?

    •  The Fed sets a target for the federal funds rate (2+ / 0-)
      Recommended by:
      LilithGardener, MKinTN

      It doesn't guarantee a price, that's why it fluctuates.

      The spikes you see are merely reflections of desperate institutions bidding up reserves to cover new loans made (by law they have to).

      So occasionally it will pop up to reflect the extremely high demand and unwillingness of other institutions to lend at that rate.

      Beyond that I'm not sure, maybe someone else has insight in this area?

      For the purposes of the point in this essay though it's just noise.

      •  Some of the spike (2+ / 0-)
        Recommended by:
        MKinTN, aguadito

        activity may be the Fed either buying or selling treasuries to move the rate towards its target.  If excess reserves exist overall in the banking system, the banks will tend to bid the rate down to zero if the Fed does not soak some of them up by selling bonds to stabilize that excess in the base, or vice versa if there are too few reserves in the base. The institutions can never get too desperate to cover their loans with reserves since the Fed will always sell them at its discount rate which also tends to keep the rate at target and from going too high in interbank lending.

        •  This sounds more likely (1+ / 0-)
          Recommended by:

          Because these fluctuations i guess did happen back in the 90's, in a time when IOR and IOER were different.

          So actually the logic i presented in my response to Lillith was probably misguided -- since the demand to sell excess reserves by desperate institutions (sorry if that seems a little backwards), while another institution decides to accept a higher yield, would spike yields, but in the end you're right, the Fed should be able to always offer at lower discount rate.

          I don't seem to see the same fluctuations in more recent data, I don't know if this is due to a change in IOR policy or what. But it would seem that excess reserves in the system would cause banks to actually be more willing to lend out at lower rates to get rid of them (as you say).

          So I think your logic pans out a bit better than mine there.

          I'm not at all an authority in that area so I was just taking a stab at the question :)

          Good post!

  •  Outstanding! (1+ / 0-)
    Recommended by:

    A very lucid explanation of a widely misunderstood topic. I look forward to your next installment.

  •  Very nice, clear explanation with data. (1+ / 0-)
    Recommended by:

    Want to tackle any other topics? Your writing on this is a breath of fresh air. Paul Krugman says the same thing about the bond vigilantes on his blog, but seems to leave a lot to "just trust me on this" due to his length constraints. This diary is excellent.

    We're not generating enough angry white guys to stay in business for the long term. --Sen. Lindsey Graham (R-SC)

    by uffdalib on Mon Feb 04, 2013 at 01:18:37 PM PST

  •  Great diary, saved for future reference. Did (0+ / 0-)

    Money and Public Purpose respond to you yet?

  •  Bond Vigilantes (1+ / 0-)
    Recommended by:

    I thought you meant someone from a James Bond movie.

    Where are all the jobs, Boehner?

    by Dirtandiron on Mon Feb 04, 2013 at 05:43:57 PM PST

  •  Maybe I missed it (1+ / 0-)
    Recommended by:

    but you have to consider that the Fed is buying more than half of all the Treasuries being sold.
       That is an enormous manipulation of the markets.

    ¡Cállate o despertarás la izquierda! - protest sign in Spain

    by gjohnsit on Mon Feb 04, 2013 at 05:44:33 PM PST

    •  Misses an even bigger "manipulation" (2+ / 0-)
      Recommended by:
      gjohnsit, katiec

      And the Treasury issuing the bonds in the first place isn't? Government manipulation creates the market.  See Katiec's comment above.

      •  They still have always had trouble controlling... (0+ / 0-)

        ...the longer end of the yield curve.

        you won't see Treasury or Fed just come in and manipulate any of the rates beyond the short-term.

        There isn't a single central bank that can reliably target 10-yr+ within a tight range, in an small/large open economy.

        the Fed is still very much in control, but the "manipulation" you refer to should remain very abstract, since they really don't target beyond the short-term, they influence (with good reliability) instead...

    •  They still buy @ market rate (0+ / 0-)

      So it's not a manipulation per se

      •  But when you print trillions of dollars (0+ / 0-)

        out of thin air to buy, it is manipulation because it doesn't reflect market dynamics.

        ¡Cállate o despertarás la izquierda! - protest sign in Spain

        by gjohnsit on Thu Feb 07, 2013 at 05:58:01 AM PST

        [ Parent ]

        •  Whatever the Fed & Treasury do is a manipulation (0+ / 0-)

          No, whatever the Fed & the Treasury do is a manipulation. They're Uncle Sam's hands on the economy. The only way to stop manipulating is if he cuts his own hands off. There is no bond market "outside" of Uncle Sam's manipulations. Sure, the "bond market" can pick and choose what mix of maturities, including zero maturity, it wants. But that's all.

          And the real, important manipulation is the Treasury's taxation and spending, not the Fed's fun and games subsequent to the Treasury's silly bond auctions, whose main purposes are distract and conquer.

          The simpler, more correct way of looking at things is that the Treasury spends printed money. Then it prints bonds and performs the purely monetary operation of selling them for dollars it had earlier printed. The Fed might reverse this operation through QE, "debt monetization" etc.  

          The bond sales / purchases are mainly just a distraction. Thinking that one way of doing them, one way of Uncle Sam moving his hands (fixing quantity, letting (relative) prices float) is less of a manipulation than another (fixing prices, letting (relative) quantities float) is crazy.

  •  Great diary (1+ / 0-)
    Recommended by:

    aquidito. Hope to see you at M&PP frequently.

  •  I thought this was a James Bond reference.......nt (0+ / 0-)

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