Tax Cut Compromise May Spur Bond Vigilantes Into Action
After telling The New York Time's DealBook on Monday that the country's real estate problems are "underappreciated" and banks could face another $1 trillion in housing-related losses, Roubini turned his attention to the tax cut agreement. He said on Twitter: "Obama-GOP tax deal costs $900 billion over two years. US kicking the can further down the road. Are bond vigilantes starting to wake up?"
Roubini Has Company
The term "bond vigilantes," coined by economist Ed Yardeni in 1984, refers to investors who protest monetary or fiscal policies by selling bonds, thus increasing yields (bond prices and yields move in the opposite direction). If the bond vigilantes fear that a nation's policies will increase inflation or -- in this case -- expand its deficit, they would demand higher yield on bonds as the country's economic risk increases (see Greece, Ireland, etc.).
And Li Daokui, an adviser to China's Central Bank, said on Wednesday that the fiscal health of the U.S. is worse than Europe's, Reuters reported, and he predicted that U.S. bond prices and the dollar would fall when the European situation stabilizes.
Treasury bonds, which already sold off this week, are dropping in early Wednesday trading, sending their yields higher. The yield on the 10-year Treasury note rose to 3.23%, its highest level since June.