According to Ed Yardeni of Yardeni Research In the past, before the era of financial
repression imposed by central banks, the 10-year Treasury bond yield tended to
trade around the y/y growth rate of nominal GDP. From the 1950s through the
1970s, the yield tended to trade below the GDP growth rate because bond
investors failed to anticipate rising inflation.
They learned their lesson and bond yields generally exceeded
GDP growth during the 1980s and early 1990s. That was the era of the "Bond
Vigilantes," a term I coined in 1983. They contributed to breaking the
back of inflation. As a result, by the late 1990s, they became less vigilant.
While they’ve been repressed in the US
by the Fed since late 2008, they were back in the saddle again during 2010 and
2011 in the peripheral countries of Europe .
But then, ECB President Mario Draghi repressed them over there when he said on
July 26, 2012 that he’ll do whatever it takes to defend the euro.
If the Fed stops repressing the Bond Vigilantes over here by
phasing out QE, then the 10-year Treasury yield should rise to the growth rate
of GDP, which was 3.4% y/y during Q1. That would probably be a big shock to the
economy….
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