There is little evidence for a big jump in prices, but some economists and bond investors fear President Biden’s policies could lead to inflation.
By Nelson D. Schwartz
The so-called bond vigilantes may be back, 30 years after they led a sell-off in Treasury securities over the prospect of higher government spending by a new Democratic administration.
The Federal Reserve has downplayed the risk of inflation, and many experts discount the danger of a sustained rise in prices. But there is an intense debate underway on Wall Street about the prospects for higher inflation and rising interest rates.
Yields on 10-year Treasury notes have risen sharply in recent weeks, a sign that traders are taking the inflation threat more seriously. If the trend continues, it will put bond investors on a collision course with the Biden administration, which recently won passage of a $1.9 trillion stimulus bill and wants to spend trillions more on infrastructure, education and other programs.
The potential confrontation made some market veterans recall the 1990s, when yields on Treasury securities lurched higher as the Clinton administration considered plans to increase spending. As a result, officials soon turned to deficit reduction as a priority.
Ed Yardeni, an independent economist, coined the term bond vigilante in the 1980s to describe investors who sell bonds amid signs that fiscal deficits are getting out of hand, especially if central bankers and others don’t act as a counterweight.
As bond prices fall and yields rise, borrowing becomes more expensive, which can force lawmakers to spend less.
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