Bond vigilantes have vanished as prices zoom
The bond vigilantes are acting a lot less vigilant these days.</br></br>There was a time, following the inflation crisis of the early 1980s, when the bond market, regardless of the Federal Reserve's policy, worked to keep a lid on bond prices just to be sure the economy didn't get too steamy. Whenever there were signs that the pace of growth was picking up, the so-called vigilantes would rush to sell, driving interest rates higher and acting as a brake on the economy.</br></br>But if last week was any indication, a new era may be upon us.</br></br>The market is soaring. The yield on the benchmark 30-year bond plummeted to 6.37% from 6.69% in just the past six trading days. Behind it all is a conviction among bond investors and traders that the Federal Reserve won't raise interest rates until inflation actually shows signs of picking up, and recent figures demonstrate that isn't happening, and probably won't, for at least a while.</br></br>Overall, of course, that's good for bonds. But it portends more volatility, and, somewhere down the road, perhaps some brutally painful losses.