QE2, The Tax Cut Deal, Interst Rates and Bond Vigilantes

So, after Obama announced his tax cut deal with Republicans, bond prices fell and interest rates spiked.

Does this spike reflect bad expectations of impending inflation and crowding out by US debt?  Or does it reflect expectations of greater growth in response to tax cut stimulus?

The news headlines are all over the place.  To my eyes, they are also inconsistent with each other.  For example, on the first page of Google News we have the following headlines:

TREASURIES-Prices fall for second day on deficit fears

US STOCKS-Financials, semiconductors help Wall St advance

Oil Down as Supplies of Gasoline, Other Fuels Grow

 and the clincher:

Gold, Silver Tumble as Dollar Gains, Curbing Demand for Alternative Assets

This is easy to sort out if one looks what simultaneously happened to the dollar, stock prices, gold, silver and possibly oil.  The dollar and stock prices went up; gold and silver went down.  That's a tell tale sign that the news contained in the tax cut deal was greater stimulus-induced growth, not impending doom. 

If the bond vigilantes were attacking, we'd see the dollar crash and precious metals spike at the same time interest rates spiked.  I'd be surprised if that happened. 

I rather expect there is a little too much optimism and that rates will fall again soon.

Update For commodity prices, expectations of greater US growth can be a mixed bag.  On the one hand, this increases the value of the dollar, which tends to reduce commodity prices; on the other hand, greater demand growth means higher commodity prices.  I think these have been the two essential factors driving commodity prices.

So, in looking for evidence of bond vigilantes, I think it's best to look at whether interest rates are varying positively or negatively with the dollar.


Popular posts from this blog

Nonlinear Temperature Effects Indicate Severe Damages to U.S. Crop Yields Under Climate Change

Commodity Prices and the Fed