In the past, before the era of financial repression imposed by central banks, the 10-year Treasury bond yield tended to trade around the y/y growth rate of nominal GDP. From the 1950s through the 1970s, the yield tended to trade below the GDP growth rate because bond investors failed to anticipate rising inflation.
They learned their lesson and bond yields generally exceeded GDP growth during the 1980s and early 1990s. That was the era of the “Bond Vigilantes,” a term I coined in 1983. They contributed to breaking the back of inflation. As a result, by the late 1990s, they became less vigilant. While they’ve been repressed in the US by the Fed since late 2008, they were back in the saddle again during 2010 and 2011 in the peripheral countries of Europe. But then, ECB President Mario Draghi repressed them over there when he said on July 26, 2012 that he’ll do whatever it takes to defend the euro.
If the Fed stops repressing the Bond Vigilantes over here by phasing out QE, then the 10-year Treasury yield should rise to the growth rate of GDP, which was 3.4% y/y during Q1. That would probably be a big shock to the economy.
Dr. Ed’s Blog
Today’s Morning Briefing: Ben’s Choices. (1) Door #1, #2, or #3. (2) Press conference pressure. (3) Will Bernanke discipline the dissenters or cave? (4) Good excuse to taper QE: Federal deficit is shrinking. (5) Hail Mary pass. (6) Old normal bond yields would be a shock for sure. (7) Big outflow from bond funds last week. (8) EM stocks and bonds are submerging. (9) QE chatter is depressing inflationary expectations and boosting TIPS yield. (10) Retail sales a plus for Q2’s GDP, while discrediting recession forecast. (11) Lowering S&P 500 Retailing to market weight. (More for subscribers.)
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