Rishabh Mishra
3 min read
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After the long-term 30-year Treasury yield jumped over 5% intraday on Monday following Moody’s downgrade of the U.S. debt, this economist suggested that the Federal Reserve shouldn’t worry and let the bond vigilantes do the work.
What Happened: Craig Shapiro, the macro strategist at Bear Traps Report, said that the Federal Reserve should do “nothing at all.”
The best way for the central bank to deal with the higher yields was “Let the bond vigilantes eat.”
The term “bond vigilantes” was coined in the 1980s by economist Ed Yardeni to describe bond market investors who protest against government fiscal or monetary policies they believe will lead to inflation.
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President Donald Trump proposed tax cuts in the ‘Big, Beautiful Bill,’ which increases the probability of an inflated fiscal deficit, making bond investors wary of the bill.
When it comes to government spending and the dependability of U.S. Treasury bonds, investors concerned about long-term stability view deficit-expanding policies unfavorably.
Thus, Shapiro reiterated that bond vigilantes could handle the unforeseen effects of the bill by selling off bonds in response to the deficit increase fueled by tax cuts.
Yardeni highlighted that the Moody’s downgrade of the U.S. long-term credit rating from Aaa to Aa1, was an additional trigger for the bond market sell-off.
“While the bond market may be just starting to anticipate a bout of higher inflation in coming months, it got hit on Friday with Moody’s downgrade of the credit rating of US government debt. In addition, bond investors are closely and nervously monitoring budget talks in Washington,” he said.
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Why It Matters: Despite spiking intraday on Monday, the Treasuries ended the day unchanged.
Kathy Jones, the chief fixed income strategist at Schwab Center for Financial Research, explained that the downgrade didn’t matter as much as the fiscal path that the government was heading on.
