[E]very few months we’re told that the bond vigilantes have arrived, and we must impose austerity now now now to appease them. Three months ago, a slight uptick in long-term interest rates was greeted with near hysteria: “Debt Fears Send Rates Up,” was the headline at The Wall Street Journal, although there was no actual evidence of such fears, and Alan Greenspan pronounced the rise a “canary in the mine.”
Since then, long-term rates have plunged again. Far from fleeing U.S. government debt, investors evidently see it as their safest bet in a stumbling economy. Yet the advocates of austerity still assure us that bond vigilantes will attack any day now if we don’t slash spending immediately.
Well, after ignoring years of supposedly runaway deficit spending, it looks like the bond vigilantes have finally seen something that they don’t like:
Treasury prices dropped Tuesday, pushing 10-year yields up by the most since June 2009, after Congress and the White House compromised on a tax package that is expected to raise the deficit and increase the government’s borrowing needs.
The drop in prices, which move inversely to yields, extended further after the government’s first of three auctions this week drew tepid demand from investors.
So while the Republicans pretend that debt from tax cuts somehow magically doesn’t count (it’s like good cholesterol or something) while debt from spending will destroy us at any moment, the bond market appears to believe the exact opposite. I wonder if all the bond vigilante hysterics will start wringing their hands about unaffordable, unsustainable tax cuts now. Yes, I think I’ll just hold my breath until that happens.