Bond Vigilantes Undercut Gov

Bond vigilantes—investors who, in protest to the government's monetary or fiscal policies policy, sell bonds to purposely drive up yield on U.S. debt—are back after 15 years of remaining on the low-down, according to Bloomberg. Higher yields mean higher interest costs for the government, making the cost of borrowing more expensive and throwing the proverbial wrench in Fed Chairman Ben Bernanke's efforts to keep borrowing costs low for consumers and businesses while also trying to jolt the economy. The 10-year Treasury yield has risen 1.4 percent this year, pushing interest rates on 30-year fixed mortgages to more than 5 percent. Edward Yardeni, who coined the vigilante term bond vigilante in 1984 and now runs Yardeni Research Inc. in Great Neck, N.Y., says they are "up in arms over the outlook for the federal deficit," which has quadrupled under President Barack Obama to $1.85 trillion. He adds that Washington is "out of control" and lacked "fiscal discipline."

The vigilante's outrage comes from a long-term perspective. For now, consumers prices remain low—in the past year, they've fallen 0.7 percent, their biggest decline since 1955—but bond guru Bill Gross, the co-chief investment officer of Pacific Investment Management Co. and manager of the world's largest bond fund, has said all the cash being pumped into the economy could cause inflation to accelerate to 3 percent to 4 percent in three years, surpassing the Fed's "preferred range" of 1.7 percent to 2 percent.

Reuters, taking the alarmist road, says because of the increasingly high yields, the "global financial crisis may morph into a second, equally virulent phase where borrowing costs rise again, hobbling an embryonic economic recovery, debilitating cash-strapped banks, and punishing investors all over again." What it calls this? Credit crisis version 2.0. Supporting that view is also the "slumping dollar" and the "fading of the bear market rally in U.S. stocks."

However, stocks rallied this week with Friday's market close capping the first full three-month gain since 2007. "The Standard & Poor's 500 Index added 1.4 percent to 919.14 at 4:05 p.m. in New York, with almost all of the advance coming after 3:30 p.m. as investors snapped up shares in the final minutes of May's 5.2 percent gain," according to Bloomberg. The Dow Jones Industrial Average gained 96.53 points, or 1.2 percent, to 8,500.33. Three stocks rose for each one that fell on the New York Stock Exchange, the site points out. Leading the rally were commodities, transportation, and financial shares.

Government data released on Friday, and reported by Reuters, revealed that the economy beat analysts' expectations; it shrank slightly less in the first quarter than initially estimated, while corporate profits rebounded. Gross domestic product tapered at a 5.7 percent annual rate in the first quarter versus the 6.1 percent estimate. In comparison, GDP shrank by 6.3 percent in the fourth quarter, and although the recent declines are "still steep," it further bolsters the view that the slowdown in the economy has become less violent. "Perceptions that the worst of the 17-month-old downturn was over pushed consumer confidence to its highest in eight months in May," Reuters writes.

The New York Times off-leads with word that Canadian auto parts maker Magna International and Sberbank of Russian have come to a tentative agreement to buy General Motors' (GM) European operations, which includes Opel of Germany as well as the British auto company Vauxhall. Secondly, Germany's government has said it will provide a $2.1 billion bridge loan to keep Opel afloat. The deal, if it goes through, dashes Fiat's hopes of growing into a "into a top-tier global company virtually overnight, with its nearly completed alliance with Chrysler" and its bid for GM's European operations. Says the paper: While the deal could help speed the bankruptcy process for GM, some industry experts have "panned" the alliance, saying the "German government had picked the Magna deal over the rival Fiat offer to safeguard nearly 25,000 jobs at home in an election year, while adding yet another player to an industry already burdened by chronic overcapacity."

"It solves nothing in terms of the industry's structure," Philippe Houchois, an analyst with UBS in London, tells the NYT. "It'll be detrimental to the whole industry's pricing ability, and not much good will come out of this."

Meanwhile the Washington Post and CNNMoney ponder GM's worth post-bankruptcy, or more importantly, how soon and how much taxpayers can hope to redeem of the $50 billion that has been pumped into the ailing company. Its worth, says CNNMoney, is also key to determining the level of future health insurance benefits for hundreds of thousands of GM retirees. The WP reports that the Treasury Department has said the United States will recover the loans within five years and will rebound over that time to become "a strapping global competitor." By then, the Treasury projection shows the company would reach an equity value of $75 billion. According to a filing by General Motors late last month and reviewed by CNNMoney, the company estimated the equity value of its common stock would be about $25 billion once it completed a reorganization in about 18 months or less. Right now, however, GM is worth $450 million worth based on Friday's closing stock price of just 75 cents a share. The last time GM was worth as much as $25 billion was late 2007.

Despite the projections/hopes/dreams of the Treasury Department and GM, analysts have their doubts about how quickly the company will be able to turn itself around. And on the condition of anonymity, an administration official told the WP, "I don't know how much we're going to recover. I'm not here to tout stock. But," he added, "we're very excited about this as a company."

And in a complete reversal of how Today's Business Press usually does it, we'll close with the Wall Street Journal's lead story: that the European Union, "frustrated with past efforts to change Microsoft Corp.'s (MSFT) behavior," is pushing a new round of sanctions against the company "that go well beyond fines." The EU's beef is a long-standing complaint that Microsoft "improperly bundles its Web browser with its Windows software." So instead of demanding that Microsoft separate its Internet Explorer from Windows, the EU plans to force a "bunch of browsers into Windows, thus diluting Microsoft's advantage." Upon launching a new computer, people may soon have the choice of which browsers they want to install and which one would be the default.