Sleepless `Vigilantes' Drive Up U.S. Treasury Yields, MIT's Johnson Says

Yields on U.S. government debt could rise as monetary policy loses its effectiveness, said Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management.

Following the Federal Reserve’s decision last month to buy $600 billion in Treasury securities, the number of investors who believe the U.S. central bank has run out of tools to stimulate the economy “certainly adds to the vulnerability down the road that they are pushing up yields” on government debt, Johnson said today in an interview on “Bloomberg On the Economy.”

“The vigilantes never sleep,” Johnson said, referring to investors who push up bond yields when they feel fiscal or monetary policies are running out of control. “In terms of a broader market perception, there’s definitely concern now about the U.S., about its fiscal position, and about the U.S.’s relative position compared with other potential assets around the world.”

Benchmark 10-year Treasury note yields rose last week by the most since August 2009. Bond prices tumbled as President Barack Obama’s agreement to extend Bush-era tax cuts showed the government is ready to increase the deficit to lower the jobless rate.

Meanwhile, Johnson said in the radio interview the overall debt levels in the core of the euro area are fine because of “very sensible fiscal policy” that is better planned than policy in the U.S. That region is working to alleviate sovereign-debt concerns after the governments of Ireland and Greece required emergency loans.

“It will be our turn to be tested by the financial markets once the euros have got their basic problems sorted out,” Johnson said.

Johnson co-authored “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown” and is a Bloomberg contributor.

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story; Christopher Wellisz at cwellisz@bloomberg.net