The 'Carrie' Trade: From Bond Vigilantes To Bond Zombies
Ed Yardeni | Dec 06, 2020 01:08AM ET
Carrie is a horror novel by Stephen King. It was his first published novel, released on April 5, 1974. It was turned into a movie in 1976 starring Sissy Spacek and John Travolta. Carrie is a misfit bullied in her high school and dealing with an abusive, religious fanatic mother at home. She finds that she can channel her angst into telekinetic powers, which she uses to exact revenge on her tormenters. Much blood is spilt along the way, including Carrie’s. In the final scene, she seems to rise from the dead but that’s just a bad dream.
The Bond Vigilantes have been buried by the Fed. However, in our nightmare scenario, they could rise from the dead like Carrie. It isn’t likely to happen if inflation also remains buried, as I expect.
Meanwhile, there are other vigilantes in the financial markets. The Dow Vigilantes sent out a blood-curdling scream when the S&P 500 plunged 33.9% in 33 days earlier this year (Fig. 9 ). The ratio currently suggests that the bond yield should be closer to 2.00% than to 1.00%. As I discussed on Monday in my Morning Briefing, the yield has remained under 1.00% since March 20, as the Fed has been buying Treasury notes and bonds faster than the Treasury has been issuing them:
“From the last week of February through the last week of October, the Fed’s holdings of Treasury securities increased $2.1 trillion as follows by maturities: One year or less ($421 billion), 1-10 years ($1,281 billion), and over 10 years ($351 billion) (Fig. 10 ). In other words, the Fed financed 62% of the Treasuries financing needs across all maturities, and purchased $613 billion more notes and bonds than were issued over that period!”
That’s the “Carrie trade.” As long as it continues, the Bond Vigilantes will remain buried.
(1) The July 27, 1983 issue of my weekly commentary was titled “Bond Investors Are the Economy’s Vigilantes.” I concluded:
“So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets. During the 1980s and 1990s, there were a few episodes when rising bond yields slowed the economy and put a lid on inflation.”
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