The Federal Reserve has boosted the Treasury bond market by keeping short-term interests at record lows, says Edward Yardeni, president of Yardeni Research.
He coined the term “bond vigilantes” in 1983 to describe investors who were selling Treasuries in reaction to inflationary economic policy by the government and Federal Reserve.
“Central banks, by keeping rates near zero, have basically covered the bond vigilantes in duct tape,” he told Bloomberg.
The negligible short-term rates have investors flocking to the long end of the Treasury yield curve — long-term Treasuries — to earn a decent return. Some investors are borrowing short-term to invest long-term.
The 10-year Treasury yield recently hit a one-year low of 3.14 percent.
The irony is that the Fed’s accommodative monetary policy, which would normally send bond vigilantes into a tizzy, has now silenced them, despite the surge of budget deficits to a record high.
“The reality is that most bond vigilantes live in a gated community — called the yield curve,” Yardeni said.
Another irony is that gold and Treasuries have rallied simultaneously.
And how do you explain that?
"We have a short-term risk aversion and a lack of suitable investment alternatives," Howard Simons, a strategist at Bianco Research, told The Wall Street Journal.
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