Blistering Treasuries Rally Silences Deficit-Obsessed Vigilantes

For most of the summer, the chatter in the bond market about swelling US deficits — and the depressing effect it was having on the price of Treasuries — was incessant.

Few, if any, were more vocal on the topic than Ed Yardeni, the godfather of the bond vigilantes. Investors, Yardeni said back in August, “are quite concerned.” The price action seemed to underscore the angst. By October, the yield on the benchmark 10-year bond had soared above 5% for the first time in 16 years.

Then, almost just as quickly as they rose, yields plunged — all the way back down to near 4%. So what happened to all the hand-wringing about reckless government spending and the ballooning national debt? Sure, the bond rally was sparked by a different development — speculation the Federal Reserve will start cutting interest rates next year — but still, the tough vigilante talk disappeared rather abruptly.

Yardeni is unfazed. Deficit concerns, he argues, don’t manifest themselves in the market consistently, day after day. When something pulls investors’ attention elsewhere — like the mounting evidence that the economy is slowing — they will backburner those worries. The jitters remain, though, Yardeni says.

The “vigilantes will be back,” Yardeni, the founder of Yardeni Research Inc., said in an interview. The surge in government spending in recent years and the jump in interest rates is creating a dangerous fiscal mix, he said. “This is not an issue that will go away unless it’s fixed. If anything, the deficit outlook is probably worse than is being anticipated.”

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