Leading Analyst Disturbed By D.C.'s Tax Cuts

To Ed Yardeni,the analyst who coined the term "bond vigilantes,"there seems to be a coincidence between today's rising bond yields and D.C.'s tax cut plans.D.C. is making it all too easy to increase the deficit by readily cutting taxes and hence decreasing revenue.As the deficit balloons,the government must pay more and more interest to skeptical investors who buy government bonds,which ultimately stresses the budget even more.
There's also a fear Federal Reserve Chairman Ben Bernanke may overshoot in his QE2 policy of buying Treasury bonds:another reason to lighten up on the bond holdings.The bond vigilantes have woken up in Europe,and are now waking up in the U.S.,Mr.Yardeni thinks.They're in the position to shut the bond market down unless the U.S. changes its policy.
Rising bond yields means retirement portfolios stuffed with bond funds will lose value,since bond prices fall as yields rise.
The U.K.'s making tremendous progress in cutting the deficit,and Europe's moving in the right direction,Mr.Yardeni said.He certainly doesn't like what he's been seeing in the U.S. recently,however,and neither do the bond vigilantes.
Bond vigilantes are big traders who insist on ever-higher interest rates to cover their risk as governments sink deeper into debt,making the cost of money increase even more.
Other observers disagree with Mr.Yardeni's assessment,saying the increase in bond yields is simply the bond market adjusting to better economic data and growing national debt,rather than the bond vigilantes waking up,and will not be disastrous.
Nonetheless,most financial advisors are urging their clients to move away from a bond market that is seen as being toppy now,and toward an improving stock market.