Are The Bond Market Vigilantes Back?
A WSJ article Saturday questions whether the bond market could derail the government's plans for healthcare and energy reform as it did back in the early years of the Clinton administration when the "bond market vigilantes" forced the government to sacrifice its healthcare project and instead address deficits.
For the sake of the economy and the millions of American's looking for jobs - not to mention the global outlook - one would sincerely hope not. The days when markets dictated policy are hopefully behind us once and for all; had we been a little less subservient to market demands (for unfettered trading, light regulation to avoid stiffling innovation, low taxes etc etc) in the first place, we may not have found ourselves in quite such dire straits.
That's not to say that the Treasury market jitters are unreasonable. The U.S. is after all embarked on a once-in-a-lifetime experiment that involves not just massive spending to get the economy out of a recession and restore an embattled banking sector to health. Officials are also attempting to rebalance growth so that it's less consumer-dependent even as demand in the rest of the world is weaker than it's been in a long time, while restoring the flow of credit to the economy without reviving the heavy dependence on leverage and the shadow banking system that was ultimately the root cause of the credit crisis. There's no blue print, no model for what policy makers are doing - from the Fed's many innovative liquidity programs to the Treasury's Auto Task Force. Hence the Treasury market's jitters - in fact, we should all be apprehensive: there are no guarantees that this will work. But equally - and the cooler heads in the bond market will agree - there isn't a palatable alternative.
The bond market is looking for guidance from the Fed as it contemplates the risky path policy makers are taking. Right or wrong, it saw a subtle signal in the Fed's mortgage bonds and agency debt purchases Thursday and Friday, when the bank bought larger amounts than in the prior rounds. It'll be looking for another signal on Wednesday, when the Fed buys Treasurys in the seven to 10-year maturities, just ahead of Thursday's announcement by Treasury of the next round of auctions which include reopenings of existing 10- and 30-year maturities - the ones where all the worries about inflation, unsustainable deficits, and ratings downgrades crystalize. There's one more opportunity for the Fed to send a signal to markets before that announcement: Early Thursday, New York Fed President Bill Dudley addresses a SIFMA conference (though how receptive markets might be remains to be seen - many still remember his March 6 speech when he indicated that Treasury purchases weren't on the table, only for the March 18 FOMC meeting to announce the immediate start of such purchases.).
Central bankers are probably hoping to be able to keep the market on an even keel until the June 23-24 FOMC meeting when they will have the opportunity to discuss the future of the Treasury purchase plan, which runs out in September, and perhaps even more importantly, start addressing in specific their exit strategy. They might just succeed, though it won't be smooth sailing.
For the sake of the economy and the millions of American's looking for jobs - not to mention the global outlook - one would sincerely hope not. The days when markets dictated policy are hopefully behind us once and for all; had we been a little less subservient to market demands (for unfettered trading, light regulation to avoid stiffling innovation, low taxes etc etc) in the first place, we may not have found ourselves in quite such dire straits.
That's not to say that the Treasury market jitters are unreasonable. The U.S. is after all embarked on a once-in-a-lifetime experiment that involves not just massive spending to get the economy out of a recession and restore an embattled banking sector to health. Officials are also attempting to rebalance growth so that it's less consumer-dependent even as demand in the rest of the world is weaker than it's been in a long time, while restoring the flow of credit to the economy without reviving the heavy dependence on leverage and the shadow banking system that was ultimately the root cause of the credit crisis. There's no blue print, no model for what policy makers are doing - from the Fed's many innovative liquidity programs to the Treasury's Auto Task Force. Hence the Treasury market's jitters - in fact, we should all be apprehensive: there are no guarantees that this will work. But equally - and the cooler heads in the bond market will agree - there isn't a palatable alternative.
The bond market is looking for guidance from the Fed as it contemplates the risky path policy makers are taking. Right or wrong, it saw a subtle signal in the Fed's mortgage bonds and agency debt purchases Thursday and Friday, when the bank bought larger amounts than in the prior rounds. It'll be looking for another signal on Wednesday, when the Fed buys Treasurys in the seven to 10-year maturities, just ahead of Thursday's announcement by Treasury of the next round of auctions which include reopenings of existing 10- and 30-year maturities - the ones where all the worries about inflation, unsustainable deficits, and ratings downgrades crystalize. There's one more opportunity for the Fed to send a signal to markets before that announcement: Early Thursday, New York Fed President Bill Dudley addresses a SIFMA conference (though how receptive markets might be remains to be seen - many still remember his March 6 speech when he indicated that Treasury purchases weren't on the table, only for the March 18 FOMC meeting to announce the immediate start of such purchases.).
Central bankers are probably hoping to be able to keep the market on an even keel until the June 23-24 FOMC meeting when they will have the opportunity to discuss the future of the Treasury purchase plan, which runs out in September, and perhaps even more importantly, start addressing in specific their exit strategy. They might just succeed, though it won't be smooth sailing.
Labels: bond market vigilantes, credit crisis, economic downturn, exit strategy, Federal Reserve, treasury market
posted by D. Soars at
2:19 PM
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