Bond Vigilantes Wrong on US Debt

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Bond Vigilantes Wrong on US Debt: Economist

Friday June 3, 2011, 1:24 pm

Investors like PIMCO's Bill Gross predict the rally in Treasurys will have to come to an end sooner rather than later, but one economist predicts the yield on the 10 year bond will hit 2.5 percent.

"To some, this rally must inevitably come to an end soon. After all, the Fed's second round of quantitative easing draws to a close this month and the US public finances are in dire straits. We disagree and continue to expect the 10-year yield to hit 2.5 percent by year end," said John Higgins, the senior market economist at Capital Economics in a research note on Friday.

The main reason for Higgins to take issue with the bond vigilantes is his belief that US borrowing costs will not rise this year or next.

"We expect the rate to still be between 0 percent and 0.25 percent come the end of 2012," he said.

"There is certainly no need for the Fed to raise rates in order to tackle inflation. While upward pressure on commodity prices has pushed up the headline rate of US PCE inflation to 2.2 percent, the core rate - excluding food and energy - is still only 1 percent."

Commodity prices have started to fall and should fall further as demand eases, according to Higgins further easing fears over inflation.

"Judging by the decline in break even inflation rates on Treasurys over the past month, investors are waking up to the reality that inflation is not a problem," he wrote.

With the market focused on Friday's US labor report, Higgins predicts unemployment will remain over eight percent until 2013 at the earliest, giving the Fed even less reason to raise rates.

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English only outside of regional forums. Reported.

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English only outside of regional forums. Reported.

Vigilante. [vij-uh-lan-tee]

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http://online.wsj.com/article/SB10001424052702304563104576364023778365148.html

Former Fed Chief Greenspan Favors Clinton-Era Tax Rates

By PHIL IZZO

Alan Greenspan, a high-profile proponent of President George W. Bush's tax cuts, now says the U.S.'s debt troubles have become so worrisome that he would support going back to Clinton-era tax rates.

"The fact that I'm in favor of going back to the Clinton tax structure is merely an indicator of how scared I am of this debt problem that has emerged and its order of magnitude," said the former chairman of the Federal Reserve in an interview Friday on CNBC.

Mr. Greenspan has long said he prefers lower tax rates in general, but has always been more concerned with keeping the deficit in check. In 1993, Chairman Greenspan disappointed congressional Republicans by effectively endorsing President Clinton's tax increases to lend support to the new president's efforts to reduce the deficit. And in 2001, with the government running a surplus, Mr. Greenspan lent support to President Bush's tax cuts, to the consternation of Democrats.

In the current debate over trimming U.S. debt, Mr. Greenspan said he prefers the plan backed by Rep. Paul Ryan (R., Wis.) that calls for deeper spending cuts without increasing taxes. But he indicated compromise is necessary to get a plan passed in Washington. "If I had my own way, I like the Ryan budget in all respects. And I think that essentially that sort of thing is what I would vote for if I were voting," he said in the interview. "But that is not going to get a majority vote in the Congress or get signed by the president of the United States."

John Boehner, the Republican House Speaker, said he disagreed with Mr. Greenspan's comments.

"I think raising taxes on job-creators is exactly the wrong prescription at this point in time. Washington has a spending problem, not a revenue problem," Mr. Boehner said at a news conference to discuss the May employment report, which showed non-farm payrolls grew by 54,000 in May, a disappointing result.

Mr. Greenspan He said that entitlement programs such as Medicare can't survive as currently structured and suggesting otherwise is dishonest. Washington is telling citizens that "they're guaranteed their medical services, and I think that's not accurate. We cannot do that granted our lack of resources," he said.

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http://online.wsj.co...3778365148.html

Former Fed Chief Greenspan Favors Clinton-Era Tax Rates

By PHIL IZZO

Alan Greenspan, a high-profile proponent of President George W. Bush's tax cuts, now says the U.S.'s debt troubles have become so worrisome that he would support going back to Clinton-era tax rates.

"The fact that I'm in favor of going back to the Clinton tax structure is merely an indicator of how scared I am of this debt problem that has emerged and its order of magnitude," said the former chairman of the Federal Reserve in an interview Friday on CNBC.

Mr. Greenspan has long said he prefers lower tax rates in general, but has always been more concerned with keeping the deficit in check. In 1993, Chairman Greenspan disappointed congressional Republicans by effectively endorsing President Clinton's tax increases to lend support to the new president's efforts to reduce the deficit. And in 2001, with the government running a surplus, Mr. Greenspan lent support to President Bush's tax cuts, to the consternation of Democrats.

In the current debate over trimming U.S. debt, Mr. Greenspan said he prefers the plan backed by Rep. Paul Ryan (R., Wis.) that calls for deeper spending cuts without increasing taxes. But he indicated compromise is necessary to get a plan passed in Washington. "If I had my own way, I like the Ryan budget in all respects. And I think that essentially that sort of thing is what I would vote for if I were voting," he said in the interview. "But that is not going to get a majority vote in the Congress or get signed by the president of the United States."

John Boehner, the Republican House Speaker, said he disagreed with Mr. Greenspan's comments.

"I think raising taxes on job-creators is exactly the wrong prescription at this point in time. Washington has a spending problem, not a revenue problem," Mr. Boehner said at a news conference to discuss the May employment report, which showed non-farm payrolls grew by 54,000 in May, a disappointing result.

Mr. Greenspan He said that entitlement programs such as Medicare can't survive as currently structured and suggesting otherwise is dishonest. Washington is telling citizens that "they're guaranteed their medical services, and I think that's not accurate. We cannot do that granted our lack of resources," he said.

His opinion carries no clout among the Libertarian fanboys who consider Greenspan a Benedict Arnold of Libertarianism.

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"We expect the rate to still be between 0 percent and 0.25 percent come the end of 2012," he said.

I think interest rates will go up at an alarming rate due to the US and other countries printing

increasingly worthless currency to cover mounting expenses, especially unfunded entitlements.

Interest rates will go up without warning and well before the end of 2012.

There will come a time a when the FED will have less power to influence rates than it has now,

because the world market will be the dog and the FED will be the tail.

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I think interest rates will go up at an alarming rate due to the US and other countries printing

increasingly worthless currency to cover mounting expenses, especially unfunded entitlements.

Interest rates will go up without warning and well before the end of 2012.

There will come a time a when the FED will have less power to influence rates than it has now,

because the world market will be the dog and the FED will be the tail.

The FED controls rates at the short end of the yield curve: the Fed Funds rate and the Fed discount rate target overnight loans, and the current 0-0.25 target is revised periodically by the FOMC. The OP is simply stating he doesn't expect the FOMC to change the target Fed Funds rate for the next year and a half. Given the sluggish state of the economy with weak GDP and horrible unemployment data, I see his point.

THe rates you are talking about going higher at the markets' direction are longer maturities on the yield curve, everything from 30 day T-Bills to 30 year Treasury Bonds. Those indeed are traded on the bond markets, and their yields are influenced by traders' perceptions of future growth, inflation, currency stability, etc. For the time being they are still at record lows. The 30 year is presently at 4.3%. That could change but despite the hits the USD keeps taking, and all the talk of US debt, investors obviously still think Treasurys are a good bet. Where there's strong demand, there's rising prices. And on bonds, rising prices = lower yields. Is it all going to fall apart? Bill Gross and the Bond Vigilantes obviously think so. But they haven't been proven right yet.

[thongd4me 69]

The FED controls rates at the short end of the yield curve: the Fed Funds rate and the Fed discount rate target overnight loans,

and the current 0-0.25 target is revised periodically by the FOMC. The OP is simply stating he doesn't expect the FOMC to change

the target Fed Funds rate for the next year and a half. Given the sluggish state of the economy with weak GDP and horrible unemployment data, I see his point.

The rates you are talking about going higher at the markets' direction are longer maturities on the yield curve, everything from 30 day T-Bills to 30 year Treasury Bonds.

Those indeed are traded on the bond markets, and their yields are influenced by traders' perceptions of future growth, inflation, currency stability, etc.

For the time being they are still at record lows. The 30 year is presently at 4.3%. That could change but despite the hits the USD keeps taking,

and all the talk of US debt, investors obviously still think Treasuries are a good bet. Where there's strong demand, there's rising prices.

And on bonds, rising prices = lower yields. Is it all going to fall apart?

Bill Gross and the Bond Vigilantes obviously think so. But they haven't been proven right yet.

Good analysis. I know you're in the financial industry and I'm not.

I just have a gut feeling that things beyond the power of the FED

will ultimately force rates up. If this happens only after the end of

2012 only time will tell. Currently I have a bearish bias. I've never

invested in bonds and things I don't really understand unless there

is a compelling argument I usually pass on. I wouldn't like to load

up on Treasuries only to see Japan and China dump their holdings.

I feel that our financial destiny may ultimately be determined by

actions of those outside our borders whose interests run contrary

to ours, not in a malicious sense but in the sense of what they feel

is good business. As China continues to look inward for market share

and less to the US, we will begin to see that things coming from

China won't be perennially cheap and we will be throwing more

and more cheaper dollars at increasingly higher priced goods

that they make, because we will have lost the capacity to make

them ourselves.

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Good analysis. I know you're in the financial industry and I'm not.

I just have a gut feeling that things beyond the power of the FED

will ultimately force rates up. If this happens only after the end of

2012 only time will tell. Currently I have a bearish bias. I've never

invested in bonds and things I don't really understand unless there

is a compelling argument I usually pass on. I wouldn't like to load

up on Treasuries only to see Japan and China dump their holdings.

I feel that our financial destiny may ultimately be determined by

actions of those outside our borders whose interests run contrary

to ours, not in a malicious sense but in the sense of what they feel

is good business. As China continues to look inward for market share

and less to the US, we will begin to see that things coming from

China won't be perennially cheap and we will be throwing more

and more cheaper dollars at increasingly higher priced goods

that they make, because we will have lost the capacity to make

them ourselves.

Your assessment is quite valid, I largely concur. I do invest in bonds, though I have no treasury holdings now. I do have corporate bonds (mostly high yield) and TIPS holdings. Am I worried? Heck yeah, but I like the yield I'm getting on the junk bonds.

I think you sell short the ability of the American economy to reinvent itself over and over again. We have a problem of governmental policy in this country. We have decades of mismanagement: inefficient tax policy, pork barrel earmark spending, regulators who are coopted by the industries they are expected to regulate, loopholes that corporate interests waltz through, and above it all a lobbyist K Street culture to make one nauseous. What we don't have in this country is a lack of smart talented hard working people who are willing to take a risk, put in the effort and compete on the global stage. I am a long-term mega-bull on the US economy because I have faith in the American entrepreneurial spirit and our unique ability to put capital and manpower behind it.