A 'bloodbath' in US bonds?

The yields on US government bonds have been driven higher in recent weeks. Are the bond vigilantes about to take their cudgels to the US?

Are the markets losing patience with US government debt? Last week three US government bond auctions met with unexpectedly lacklustre demand. The yield on the ten-year Treasury jumped to a nine-month high of 3.9%.

In a further sign of market stress, the ten-year yield rose above the ten-year swap rate for the first time in living memory. The swap rate measures the cost of interbank borrowing. So this move implies the US government is a bigger credit risk than banks. The worry is that investors are now balking at the record debt sales needed to cover this year's deficit of $1.4trn and imposing a sustained rise in yields (via falling bond prices). In short, they want higher interest rates to compensate for the huge supply increases. The trouble is Treasury yields are the benchmark for interest rates across the economy. Higher yields will mean higher mortgage, credit card and corporate borrowing costs. That's a nasty cocktail that could choke off the anaemic recovery and hit equities.

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