Stock Vigilantes Replace Bonds on Debt Ceiling, Yardeni Says

Yardeni Research Inc. President Edward Yardeni
Yardeni Research Inc. president Edward Yardeni. Photographer: Jin Lee/Bloomberg

Stock market investors are replacing those in fixed-income as the vigilantes seeking to force lawmakers to reach an agreement to lift the U.S. debt limit, according to economist Edward Yardeni.

The Standard & Poor’s 500 Index lost 2 percent to 1,304.89 yesterday in New York for its biggest slide since June 1 as talks to lift the $14.3 trillion limit that is exhausted Aug. 2 stalled. Yields on benchmark 10-year notes remained below 3 percent, compared with an average of 4.03 percent since 2001.

“If there’s going to be any market where there are vigilantes, it’s the stock market,” said Yardeni, who coined the term in 1983 for investors who dispute politics by dumping bonds. “If the Treasury really is forced to cut back its spending, if it can’t make checks out to government employees and can’t pay its bills, that’s going to have a very immediate depressing impact on the economy, which depresses earnings which depresses stock prices.”

House Speaker John Boehner revised his plan yesterday to raise the U.S. debt ceiling as he gained support among fellow Republicans for a proposal which Senate Democrats said will not pass their chamber. The Congressional Budget Office said Boehner’s new plan would cut $915 billion in spending over a decade, still short of the $2.2-trillion Senate plan.

“Treasuries are still extremely safe, the whole issue of credit quality is really more of a political statement than it is an assessment of our ability to pay,” Yardeni, president and chief investment strategist at Yardeni Research Inc. in New York, said in a telephone interview yesterday.

Clinton Package

Vigilantes’ greatest claim to victory was the 1993 decision by President Bill Clinton to abandon plans for an economic stimulus package on the advice of Robert Rubin, then an administration economic adviser, who said it would reduce demand for Treasuries, leading to increased borrowing costs.

Benchmark 10-year note yields rose three basis points, or 0.03 percentage point, to 2.98 percent in New York yesterday, according to Bloomberg Bond Trader prices.

During the 2008 financial crisis, U.S. stocks plunged and the S&P tumbled the most since the 1987 crash after the House of Representatives rejected a $700 billion plan on Sept. 29, 2008, to rescue the financial system. Congressmen voted 228 to 205 against the measure to authorize the biggest government intervention into markets since the Great Depression, extending the S&P 500’s decline in September to 14 percent.

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