By: Jeff Sanford

Yields on the 30-year Treasury bonds hit a 2009 high in May when they touched 4.6% last week, almost double the 2.5% hit just six months ago, while oil has moved up to touch $68. What are we to make of these moments? Choose your interpretation.

Pro:

1. Oil is rising because investors see a recovery.

2. Government bond yields in the U.S. are rising because people are moving money out of the bond to riskier assets to take advantage of said recovery.

Con:

1. Oil is rising not because times are good but because the U.S. dollar is falling and investors are looking for real, hard assets as a place to hedge that rise.

2. Bond yields are rising because bond buyers are worried about the future ability of the U.S. government to deal with rising government deficits.

What’s the correct interpretation? I’m going to go with Con on this one. Check out the U.S. dollar. It lost more than six percent of its value in May, the biggest monthly fall since 1985, while gold just hit $980 last week, a three-month high. That is, the price of other “worry” assets suggests oil and bond yields are moving for all the wrong reasons. If these were positive developments you’d think gold would be falling. It’s not.

The liabilities piling up on the U.S. government—stimulus spending, retiring boomers—are mounting and bond buyers are demanding a higher yield to hold government debt. The Wall Street Journal called this emerging dynamic the return of the bond vigilantes. The U.S. government has made a lot of promises, but whether it will be able to borrow enough money to fulfill all the promises is now being questioned a little more by the bond market. This sort of market discipline wasn’t a factor in the lower deficit boom years of the late ’90s. But as the macro situation shifts from the golden age to…whatever comes next…bond buyers are beginning to get a little nervous. Who can blame them? Now that we’re into an era of unsure energy supply, broke retirees and damaged consumer spending, private capital would be remiss not to apply a little vigilantism to its investing.