The bond vigilantes challenged the Fed to a dual today, selling off 10-year and 30-year bond futures in defiance of the FOMC's statement yesterday suggesting that they would buy long-term treasuries. This was a great trade!The FOMC attempted to use a verbal intervention to force interest rates lower, but it didn't work! The bond vigilantes would have none of it, and they didn't take the challenge lying down. They sold treasuries forcefully today in an open challenge to the Fed to do so. The 5-year note auction showed weaker-than-expected bids, and the sale was on in earnest.
With the U.S. government borrowing money in unprecedented quantities, bond holders world-wide are beginning to demand higher interest rates in order to hold debt that is more and more likely to be labeled with down-graded debt ratings and a higher probability of default. They want to be compensated for the increased risk!
On the blog of another financial blogger who is a bond specialist, he said that, "Investors are punishing profligate taxpayers for prodigious spending." Well said. His blog is located here:
Across the Curve
