Bloomberg: Bond Vigilantes are testing the Obama Administration

[TWiley]

An interesting example of the price control private corps have over the capital markets.


Bond Vigilantes Push U.S. Treasuries Into Bear Market (Update1)
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By Dakin Campbell and Daniel Kruger

Feb. 10 (Bloomberg) -- The bond vigilantes may be making a comeback.

A decade after forcing Bill Clinton to abandon his spending plans in favor of a balanced budget, investors in Treasuries are bedeviling President Barack Obama as he embarks on the most costly spending plan in U.S. history, driving up borrowing costs for the government and consumers.

Treasuries have lost 3.6 percent this year, their worst annual start since 1980, according to Merrill Lynch & Co.’s Treasury Master Index data. Yields climbed on longer-maturity debt in five of the past six weeks as bond prices fell amid concern that the Federal Reserve may not buy U.S. debt to keep yields low while the government increases its borrowing.

“The bond vigilantes are testing” the administration and Fed policy makers, said Tom di Galoma, managing director of government bonds at Jefferies & Co., a brokerage for institutional investors in New York.

Full Story Here: http://www.bloomberg.com/apps/news?pid=20601213&sid=a_LbjMwxIezE&refer=home

[Phoebe Loosinhouse]

1. Can you summarize what the article is saying?

I read it and I really did not have good comprehension of what the point was.

What is the goal of the so-called "bond vigilantes"? "Testing" the adminstration and fed policy makers to what end?

[BootinUp]

2. T-Bills are being sold

lowering their cost and increasing their yield. This drives interest rates higher.

[TWiley]

3. To me it is saying

That corporate America has more influence over the capital markets than Congress, the American People, or even the President of the United States.

The article discusses how the so-called "Bond Vigilantes" forced President Clinton to abandon his bugetary spending proposals because corporate America forced the cost of Government borrowing up. One self-proclaimed vigilante, Mr Coats was head of the largest Government Bond buying organization at the time, and pretty much predicts the same fate for Mr. Obama stimulus plan.

I think it is obscene that the capital markets have recieved such a massive bailout at the taxpayer expense under the Bush Administration, funded illegal wars for mineral wealth without batting an eye, and now seek to trash America for conservative political reasons.

Frankly, I think the influence of this group is obscene.

Think of it this way. Would you rather borrow say 1 Trillon dollars at .25% interest, or the same amount at 10%? Private individuals are setting the interest the government must pay to borrow money for political reasons.

[ThomWV]

4. Sure, I'd be happy to. What it says is that historically low rates have risen a bit.

What its saying in the end is that bond rates, which they do not mention are at historically low rates, have risen a bit in anticipation of the upcoming surge in new borrowing.

I presume you already understand how bond rates are set, but in a nutshell it works out like this. When the bond matures the Government will pay its face value; lets call it $1,000. When these things are sold its done by auction and everyone tries to pay the lowest price they can and still buy the quantity they want. If you bid $900 on the bond and it matures next year at which time the Government will give you $1,000 for it then what has happened is that you have received 10% return plus your original investment. Pretty simple. The lower the price of the bond the higher the effective interest rate of the bond. OK, that's for new bonds - what about old ones that are still in circulation, after all these things are not one year paper, they have lives of decades and are bought and resold all the time. And what about Corporate bonds, are they the same? Yes, corporate bonds are the same except they are generally not placed by public auction but are sold to brokers who act as clearing houses for them and also conduct the secondary market for them, but the principle is still the same - the less you pay the higher the yield. About the age of bonds. The closer the bond comes to its maturity date the closer its market value will be to its face value because on the last day the face value is all you can get for it.

Make sense?