US bond rout raises mortgage cost,hampers real estate recovery

To understand how this is all connected,you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. “If the meltdown continues in the bond market,then mortgage yields will soon be at levels that choke off refinancing activity,” said economist Ed Yardeni,who runs his own investment firm. Yardeni coined the term “bond vigilantes” in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn’t doing enough to fight inflation,which was running at an annual rate of more than 3 per cent at that time. So what has set off the vigilantes this spring,at a time when the consumer price index is down at an annual rate of 0.7 per cent? One explanation is that bond investors anticipate a greater supply of government debt being sold to fund federal spending. Investors are also increasingly fearful that the trillions of dollars the government will need to borrow in the coming years to finance the various stimulus programmes will lead to a new bout of inflation.