Bond Vigilantes Confront Obama as Housing Falters
http://www.bloomberg.com/apps/news?pid=20601087&sid=akW9GQw.X9KM&refer=worldwide
Bond Vigilantes Confront Obama as Housing Falters (Update2)
By Liz Capo McCormick and Daniel Kruger
May 29 (Bloomberg) -- Theyâre back.
For the first time since another Democrat occupied the White House, investors from Beijing to Zurich are challenging a presidentâs attempts to revive the economy with record deficit spending. Fifteen years after forcing Bill Clinton to abandon his own stimulus plans, the so-called bond vigilantes are punishing Barack Obama for quadrupling the budget shortfall to $1.85 trillion. By driving up yields on U.S. debt, they are also threatening to derail Federal Reserve Chairman Ben S. Bernankeâs efforts to cut borrowing costs for businesses and consumers.
The 1.5-percentage-point rise in 10-year Treasury yields this year pushed interest rates on 30-year fixed mortgages to above 5 percent for the first time since before Bernanke announced on March 18 that the central bank would start printing money to buy financial assets. Treasuries have lost 5.1 percent in their worst annual start since Merrill Lynch & Co. began its Treasury Master Index in 1977.
âThe bond-market vigilantes are up in arms over the outlook for the federal deficit,â said Edward Yardeni, who coined the term in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds. He now heads Yardeni Research Inc. in Great Neck, New York. âTen trillion dollars over the next 10 years is just an indication that Washington is really out of control and that there is no fiscal discipline whatsoever.â
Investor Dread
What bond investors dread is accelerating inflation after the government and Fed agreed to lend, spend or commit $12.8 trillion to thaw frozen credit markets and snap the longest U.S. economic slump since the 1930s. The central bank also pledged to buy as much as $300 billion of Treasuries and $1.25 trillion of bonds backed by home loans.
For the moment, at least, inflation isnât a cause for concern. During the past 12 months, consumer prices fell 0.7 percent, the biggest decline since 1955. Excluding food and energy, prices climbed 1.9 percent from April 2008, according to the Labor Department.
Bill Gross, the co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co. and manager of the worldâs largest bond fund, said all the cash flooding into the economy means inflation may accelerate to 3 percent to 4 percent in three years. The Fedâs preferred range is 1.7 percent to 2 percent.
âThereâs becoming an embedded inflationary premium in the bond market that wasnât there six months ago,â Gross said yesterday in an interview at a conference in Chicago.
Shrinking Economy
Bonds usually rally when the economy is in recession and inflation is subdued. Gross domestic product dropped at a 5.7 percent annual pace in the first quarter, after contracting at a 6.3 percent rate in the last three months of 2008, according to the Commerce Department.
This time itâs different because the Congressional Budget Office projects Obamaâs spending plan will expand the deficit this year to about four times the previous record, and cause a $1.38 trillion shortfall in fiscal 2010. The U.S. will need to raise $3.25 trillion this year to finance its objectives, up from less than $1 trillion in 2008, according to Goldman Sachs Group Inc., one of 16 primary dealers of U.S. government securities that are obligated to bid at Treasury auctions.
âThe deficit and funding the deficit has become front and center,â said Jim Bianco, president of Bianco Research LLC in Chicago. âThe Fed is going to have to walk a fine line here and has to continue with a policy of printing money to buy Treasuries while at the same time convince the market that this isnât going to end in tears with fits of inflation.â
âPotential Benefitsâ
Ten-year note yields, which help determine rates on everything from mortgages to corporate bonds, rose as much as 1.71 percentage points from a record low of 2.035 percent on Dec. 18. That was two days after the Fed said it was âevaluating the potential benefits of purchasing longer-term Treasury securitiesâ as a way to keep consumer borrowing costs from rising.
The yield on the 10-year note climbed 14 basis points, or 0.14 percentage point, to 3.60 percent this week, according to BGCantor Market Data. The price of the 3.125 percent security maturing in May 2019 tumbled 1 5/32, or $11.56 per $1,000 face amount, to 96 2/32. The yield touched 3.748 percent yesterday, the highest since November.
The dollar has also begun to weaken against the majority of the worldâs most actively traded currencies on concern about the value of U.S. assets. The dollar touched $1.4135 per euro today, the weakest level this year.
Bond Intimidation
Ten-year yields climbed from 5.2 percent in October 1993, about a year after Clinton was elected, to just over 8 percent in November 1994. Clinton then adopted policies to reduce the deficit, resulting in sustained economic growth that generated surpluses from his last four budgets and helped push the 10-year yield down to about 4 percent by November 1998.
Clinton political adviser James Carville said at the time that âI used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.â
The surpluses of the Clinton administration turned into record deficits as George W. Bush ramped up spending, including financing of the wars in Iraq and Afghanistan.
The bond vigilantes are being led by international investors, who own about 51 percent of the $6.36 trillion in marketable Treasuries outstanding, up from 35 percent in 2000, according to data compiled by the Treasury.
New Group
âThe vigilante group is different this time around,â said Mark MacQueen, a partner and money manager at Austin, Texas- based Sage Advisory Services Ltd., which oversees $7.5 billion. âItâs major foreign creditors. This whole idea that we need to spend our way out of our problems is being questioned.â
MacQueen, who started in the bond business in 1981 at Merrill Lynch, has been selling Treasuries and moving into corporate and inflation-protected debt for the last few months.
Chinese Premier Wen Jiabao said in March that China was âworriedâ about its $767.9 billion investment and was looking for government assurances that the value of its holdings would be protected.
The nation bought $5.6 billion in bills and sold $964 million in U.S. notes and bonds in February, according to Treasury data released April 15. It was the first time since November that China purchased more securities due in a year or less than longer-maturity debt.
Obamaâs Confidence
Treasury Secretary Timothy Geithner, who will travel to Beijing next week, will encourage China to boost domestic demand and maintain flexible markets, a Treasury spokesman said yesterday.
Obama spokesman Robert Gibbs said the president is confident that his budget and economic plans will cut the deficit and bring down the nationâs debt.
âThe president feels very comfortable with the steps that the administration is taking to get our fiscal house in order and understands how important it is for our long-term growth,â Gibbs said.
Investors are also selling Treasuries as the economy shows signs of bottoming and credit and stock markets rebound, lessening the need for the relative safety of government debt. And while yields are rising, they are still below the average of 6.49 percent over the past 25 years.
-CONTINUED-
http://www.bloomberg.com/apps/news?pid=20601087&sid=akW9GQw.X9KM&refer=worldwide
Bond Vigilantes Confront Obama as Housing Falters (Update2)
By Liz Capo McCormick and Daniel Kruger
May 29 (Bloomberg) -- Theyâre back.
For the first time since another Democrat occupied the White House, investors from Beijing to Zurich are challenging a presidentâs attempts to revive the economy with record deficit spending. Fifteen years after forcing Bill Clinton to abandon his own stimulus plans, the so-called bond vigilantes are punishing Barack Obama for quadrupling the budget shortfall to $1.85 trillion. By driving up yields on U.S. debt, they are also threatening to derail Federal Reserve Chairman Ben S. Bernankeâs efforts to cut borrowing costs for businesses and consumers.
The 1.5-percentage-point rise in 10-year Treasury yields this year pushed interest rates on 30-year fixed mortgages to above 5 percent for the first time since before Bernanke announced on March 18 that the central bank would start printing money to buy financial assets. Treasuries have lost 5.1 percent in their worst annual start since Merrill Lynch & Co. began its Treasury Master Index in 1977.
âThe bond-market vigilantes are up in arms over the outlook for the federal deficit,â said Edward Yardeni, who coined the term in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds. He now heads Yardeni Research Inc. in Great Neck, New York. âTen trillion dollars over the next 10 years is just an indication that Washington is really out of control and that there is no fiscal discipline whatsoever.â
Investor Dread
What bond investors dread is accelerating inflation after the government and Fed agreed to lend, spend or commit $12.8 trillion to thaw frozen credit markets and snap the longest U.S. economic slump since the 1930s. The central bank also pledged to buy as much as $300 billion of Treasuries and $1.25 trillion of bonds backed by home loans.
For the moment, at least, inflation isnât a cause for concern. During the past 12 months, consumer prices fell 0.7 percent, the biggest decline since 1955. Excluding food and energy, prices climbed 1.9 percent from April 2008, according to the Labor Department.
Bill Gross, the co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co. and manager of the worldâs largest bond fund, said all the cash flooding into the economy means inflation may accelerate to 3 percent to 4 percent in three years. The Fedâs preferred range is 1.7 percent to 2 percent.
âThereâs becoming an embedded inflationary premium in the bond market that wasnât there six months ago,â Gross said yesterday in an interview at a conference in Chicago.
Shrinking Economy
Bonds usually rally when the economy is in recession and inflation is subdued. Gross domestic product dropped at a 5.7 percent annual pace in the first quarter, after contracting at a 6.3 percent rate in the last three months of 2008, according to the Commerce Department.
This time itâs different because the Congressional Budget Office projects Obamaâs spending plan will expand the deficit this year to about four times the previous record, and cause a $1.38 trillion shortfall in fiscal 2010. The U.S. will need to raise $3.25 trillion this year to finance its objectives, up from less than $1 trillion in 2008, according to Goldman Sachs Group Inc., one of 16 primary dealers of U.S. government securities that are obligated to bid at Treasury auctions.
âThe deficit and funding the deficit has become front and center,â said Jim Bianco, president of Bianco Research LLC in Chicago. âThe Fed is going to have to walk a fine line here and has to continue with a policy of printing money to buy Treasuries while at the same time convince the market that this isnât going to end in tears with fits of inflation.â
âPotential Benefitsâ
Ten-year note yields, which help determine rates on everything from mortgages to corporate bonds, rose as much as 1.71 percentage points from a record low of 2.035 percent on Dec. 18. That was two days after the Fed said it was âevaluating the potential benefits of purchasing longer-term Treasury securitiesâ as a way to keep consumer borrowing costs from rising.
The yield on the 10-year note climbed 14 basis points, or 0.14 percentage point, to 3.60 percent this week, according to BGCantor Market Data. The price of the 3.125 percent security maturing in May 2019 tumbled 1 5/32, or $11.56 per $1,000 face amount, to 96 2/32. The yield touched 3.748 percent yesterday, the highest since November.
The dollar has also begun to weaken against the majority of the worldâs most actively traded currencies on concern about the value of U.S. assets. The dollar touched $1.4135 per euro today, the weakest level this year.
Bond Intimidation
Ten-year yields climbed from 5.2 percent in October 1993, about a year after Clinton was elected, to just over 8 percent in November 1994. Clinton then adopted policies to reduce the deficit, resulting in sustained economic growth that generated surpluses from his last four budgets and helped push the 10-year yield down to about 4 percent by November 1998.
Clinton political adviser James Carville said at the time that âI used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.â
The surpluses of the Clinton administration turned into record deficits as George W. Bush ramped up spending, including financing of the wars in Iraq and Afghanistan.
The bond vigilantes are being led by international investors, who own about 51 percent of the $6.36 trillion in marketable Treasuries outstanding, up from 35 percent in 2000, according to data compiled by the Treasury.
New Group
âThe vigilante group is different this time around,â said Mark MacQueen, a partner and money manager at Austin, Texas- based Sage Advisory Services Ltd., which oversees $7.5 billion. âItâs major foreign creditors. This whole idea that we need to spend our way out of our problems is being questioned.â
MacQueen, who started in the bond business in 1981 at Merrill Lynch, has been selling Treasuries and moving into corporate and inflation-protected debt for the last few months.
Chinese Premier Wen Jiabao said in March that China was âworriedâ about its $767.9 billion investment and was looking for government assurances that the value of its holdings would be protected.
The nation bought $5.6 billion in bills and sold $964 million in U.S. notes and bonds in February, according to Treasury data released April 15. It was the first time since November that China purchased more securities due in a year or less than longer-maturity debt.
Obamaâs Confidence
Treasury Secretary Timothy Geithner, who will travel to Beijing next week, will encourage China to boost domestic demand and maintain flexible markets, a Treasury spokesman said yesterday.
Obama spokesman Robert Gibbs said the president is confident that his budget and economic plans will cut the deficit and bring down the nationâs debt.
âThe president feels very comfortable with the steps that the administration is taking to get our fiscal house in order and understands how important it is for our long-term growth,â Gibbs said.
Investors are also selling Treasuries as the economy shows signs of bottoming and credit and stock markets rebound, lessening the need for the relative safety of government debt. And while yields are rising, they are still below the average of 6.49 percent over the past 25 years.
-CONTINUED-