Being righteous does not matter if you don’t have the right ammunition. Opinions are just musings without capital or the ability to move capital. Bond vigilantes used to have enough relative capital to move markets. That is not now the case because they are fighting a battle against central banks who have the power of money from printing presses. Actually, there will be two markets. One where central banks rule and the other controlled by the vigilantes where capital is scarce and disciplined by economic reality and profit
We are not arguing against the use of monetary policy in the current situation; however, the price of risks will not be determined by private investors but by policymakers in the places where they use their capital. Some of these dislocations based on liquidity shocks will be closed faster because central banks have more power than vigilantes while others will be allowed to persist. Dislocations and price differences will be closed not by private investors but by the choice of governments and central bankers.
There will be two markets: One controlled by central bank printing presses their motives and the other by private investors and their profits.
The bond vigilantes will not assess specific company or market risks for those sectors where central banks play but will focus on what policy-makers belief to be essential for their interpretation of properly behaved markets. In other places, it will be private capital driving decisions.
There will be two sets of rules, the law of the central bankers, and the rules of the vigilantes "West of the Pecos".
We are not arguing against the use of monetary policy in the current situation; however, the price of risks will not be determined by private investors but by policymakers in the places where they use their capital. Some of these dislocations based on liquidity shocks will be closed faster because central banks have more power than vigilantes while others will be allowed to persist. Dislocations and price differences will be closed not by private investors but by the choice of governments and central bankers.
There will be two markets: One controlled by central bank printing presses their motives and the other by private investors and their profits.
- Commercial paper liquidity dislocations, if A1/P1 will closed by the Fe. If you are A2/P2, you will be priced by money market vigilantes and capital flows.
- Off-the-run Treasuries dislocations will be closed by funding from the Fed and outright purchases. Bond vigilantes will have to just follow the Fed.
- Agency mortgage risks will be deflated by Fed buying. Non-agency and other mortgage markets will be disciplined by the vigilantes.
- Sovereign bond risk across eurozone will priced by the ECB and not the bond vigilantes. They will have to be followers and anticipate the risk pricing of the central bank not their assessment of government finances.
- Investment grade corporates will have the Fed disciplining the market while high yield will be government by the vigilantes.
The bond vigilantes will not assess specific company or market risks for those sectors where central banks play but will focus on what policy-makers belief to be essential for their interpretation of properly behaved markets. In other places, it will be private capital driving decisions.
There will be two sets of rules, the law of the central bankers, and the rules of the vigilantes "West of the Pecos".
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