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Fed Captain and the World of Tomorrow

The Emerging View

22 November 2013

Bond vigilantes 1 – 0 Fed The US treasury market is already caught up in an almighty battle between bond vigilantes and the Fed. The bond vigilantes won the first round, when they forced the Fed to U-turn on tapering in September. The risk for the Fed is the long end of the curve. The US economy is heavily indebted and higher real rates can inflict real damage. So when the Fed announced its intention to taper in May, Fed Chairman Ben Bernanke went out of his way to stress that tapering is not the same as rate hikes. Clearly he believed he could control the long end of the curve through verbal guidance. In retrospect, this belief was hubris: Bond vigilantes ignored Bernanke’s rate guidance, and proceeded to push 2s30s to near their all-time high as well as pricing in nine rate hikes by Q3 2016.

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