As an addendum to Michael's post below, some additional thoughts on yesterday's bond market mayhem.

This week the United States Treasury began selling $100 billion in new bonds to begin financing of what is the biggest federal spending program since World War II. It is certainly no surprise that financials markets have reacted as expected and interest rates have begun their inexorable march upward. The Wall Street Journal aptly describes yesterday's spike in interest rates as the return of the bond vigilantes:

They're back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession.

Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November. Treasury yields had stayed low, and the dollar had remained strong, as long as investors were looking for the safest financial port amid the post-September panic. But as risk aversion subsides, and investors return to corporate bonds and other assets, investors are now calculating the risks of renewed dollar inflation.

They have cause to be worried, given Washington's astonishing bet on fiscal and monetary reflation....

The market is again reminding Washington that the Federal Reserve does not control interest rates. The Fed can print money (and it has, at an astonishing rate this year) but it can't control the price of that money. We are witnessing a replay of the 1970's era inflation as oil and interest rates (which track each other) rise in a shrinking economic environment. As the Journal notes..

It's not going too far to say we are watching a showdown between Fed Chairman Ben Bernanke and bond investors, otherwise known as the financial markets. When in doubt, bet on the markets.

President Obama is selling 3.5% economic growth next year as part of his deficit reduction plan. The credit markets obviously aren't buying this. It is a wonder that anyone believes a word coming out of this administration on fiscal and economic matters.