It's interesting to see the mainstream economists now telling everyone how there are no such things as bond vigilantes in the USA (see DeLong and Krugman here). This wasn't always the case. Krugman and Delong were once fearful of bond vigilantes. So it's nice to see some flexibility in understanding here.
Anyhow, over the last few years I have published EIGHTY EIGHT articles regarding the bond vigilantes and why this persistent fear was a load of nonsense. In the course of this effort I've explained why there was no bond bubble, why Europe's crisis was different, why Tim Geithner didn't understand what he was talking about, why Alan Greenspan didn't understand what he was talking about and making other controversial comments (including criticisms of mainstream economists).
As Paul Krugman has said in the past, these weren't small claims. In fact, I'd argue that they were at the heart of understanding what was going on in the economy in the last few years. Unlike Krugman's original stance, this was never about "liquidity preferences" or "liquidity traps". Sometimes I feel like I am screaming into an empty hole here at Pragcap. Maybe it is empty? Anybody out there?
Anyhow, from a bond trader's perspective, it was all rather self explanatory. Fixed income traders front-run the Fed who tries to front-run the economy. When you combined this with the understanding of how the monetary system works and how the US government can't "run out of money" all the pieces fell into place. And the conclusion was simple - bond vigilantes are mythical. They don't exist in the USA. Yes, fixed income traders set prices of long bonds in the market, but these rates are an extension of short rates which are an extension of Fed policy which is an extension of current economic conditions….
In all likelihood, rising rates in the USA means the economy is better. Low rates means the economy is still muddling through. We shouldn't fear rising yields. We should welcome them.
Anyhow, it's nice to see the mainstream catching on after all these years…