Bond Vigilantes Take Reins as Fed Lets Markets Tighten

The US Federal Reserve has chosen to let markets play a bigger role in tightening financial conditions. In recent weeks, long-term borrowing costs have risen across most of the market, with the biggest increases at the longer end.

According to Fed Chairman Kevin Warsh, the central bank controls the overnight interest rate, but investors set longer-term Treasury yields. Since Warsh's first meeting in June, the 30-year yield has risen about 34 basis points, while the 10-year has gained about 24 basis points.

Warsh wants markets to play a bigger role in determining borrowing costs, echoing former Fed Chair Alan Greenspan's approach of giving investors more room to form their own views. This leaves more of the tightening in the hands of bond vigilantes, who push government borrowing costs higher by demanding better returns.