Bond Vigilantes Could Target US: Roubini

Economist Nouriel Roubini on Wednesday voiced concern over a compromise on extending tax cuts struck by US President Barack Obama and Republican leaders, saying the agreement could expose the US to bond vigilantes who will drive up bond yields.

cnbc.com

Bond vigilantes – the term was coined by economist Ed Yardeni in the 1980s to describe major investors who demand higher yields to compensate for the perceived risks resulting from large deficits - could derail the country’s precarious recovery, some economists say.

Roubini, who has been dubbed Dr Doom since he accurately forecast the latest financial crisis, said on Twitter: “Obama-GOP tax deal costs $900 billion over two years. US kicking the can further down the road. Are bond vigilantes starting to wake up?”

Republican leaders and the White House agreed earlier this week to extend tax cuts on all income groups for two years and extend unemployment benefits in a deal which they hope will spur economic growth and cut unemployment.

Roubini is not alone in thinking the deal could worsen the US deficit and put the country at risk.

Chinese central bank adviser Li Daokui said on Wednesday the fiscal health of the United States was worse than Europe's, and that the dollar had so far been shielded from trouble because markets are still focused on debt-laden European countries.

US bond prices and the dollar would fall when the European situation stabilizes, Daokui said.