Morgan Stanley: Interest Rates Set To Soar 40% As Bond Vigilantes Make Geithner And Obama Pay For Their Mess

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Get ready for a wild ride on the long end of the curve, as the bond vigilantes go to work making Barack Obama and Tim Geithner pay for the bailout.

Bloomberg: Yields on benchmark 10-year notes will climb about 40 per cent to 5.5 per cent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 per cent to 8 per cent, almost the highest in a decade, Greenlaw said.

Investors are demanding higher returns on government debt, boosting rates this month by the most since January, on concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion. Rising borrowing costs risk jeopardizing a recovery from a plunge in the residential mortgage market that led to the worst global recession in six decades.

“When you take these kinds of aggressive policy actions to prevent a depression, you have to clean up after yourself,” Greenlaw said in a telephone interview. “Market signals will ultimately spur some policy action but I’m not naive enough to think it will be a very pleasant environment.”

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