G OVERNMENT C APITAL C ORPORATION

                                                                                                                             J UNE , 2009

Bond Vigilantes & Unintended Consequences                                                           R ECENT C LOSINGS :
In 1983, economist Ed Yardeni coined the term “bond vigilantes” to de-                                          Idaho County
scribe how bond traders took matters into their own hands when they felt                                          Software
the Fed was not doing enough to fight inflation, which was running at an                                      $200,230 * 5 years
annual rate of more than 3 percent at the time. Anyone who watches inter-                             Texas Emergency Services District
est rates knows that the vigilantes are back with a vengeance.                                            Facilities and Equipment
                                                                                                           $1,074,973 * 20 years
Yields on 10 year Treasury notes have jumped from 2.5% in March to                                       New York Fire Department
3.85% in early June. What has triggered this latest run up in rates? Well,                                   Fire Equipment
inflation is running at an annual rate of 0.7% so any worries about current                                $386,323 * 15 years
inflation must not be the cause. The consensus explanation among bond
traders and economists is the markets are expecting a much greater supply                             Oklahoma Rural Water Authority
of government debt being sold to fund increased federal spending. Investors                             Water Metering Equipment
                                                                                                            $384,015 * 3 years
are also very concerned that the trillions of dollars the government will need
to borrow in coming years to fund this spending will lead to a new bout of                                     Missouri School
inflation.                                                                                                    Roof Construction
                                                                                                              $308,000 * 2 years
This recent run up in Treasury rates has finally pushed the Muni/Treasury                                   Texas School District
relationship back to historic norms, meaning that municipal rates have actu-                               Current Refunding Bonds
ally drifted lower as Treasury rates have climbed. The current ratio be-                                    $2,135,000 * 20 years
tween the yields of municipals and treasuries is now running around 80%,
down from 119% in March.                                                                                     State of Oklahoma
                                                                                                         Energy Conservation Project
                                                                                                           $7,557,863 * 15 years
Going forward, look for municipal rates to move in tandem with Treasuries.
The unintended consequence of massive federal government spending is                                Alabama Volunteer Fire Department
likely to be higher inflation which will drive Treasury rates upward. This                                   Fire Equipment
will undoubtedly also lead to correspondingly higher municipal rates.                                      $76,027 * 12 years
                                                                                                        Pennsylvania Sewer Authority
Continued concerns over inflation and the impact on rates will guarantee                                    Filtration Equipment
interesting markets in the coming months.                                                                  $1,520,917 * 15 years

       By Ted Christensen, Vice President, Government Capital Securities Corporation                      Texas Community College
                                                                                                             Various Equipment
                       June 8, 2009              March 9, 2009              December 8,2008                  $510,000 * 1 year
Fed Funds Rate             0.25 %                   0.25 %                       2.00 %
                                                                                                                California City
Prime Lending Rate         3.25 %                    3.25 %                         4.00 %                      Phone System
                                                                                                              $486,788 * 5 years
10-year T-Bill             3.89 %                    2.90 %                         2.76 %

Government Capital Corporation is a market leader providing innovative financing solutions to the public sector. With over 5,000 public
transactions across the country and over $1 Billion financed, we have the expertise to meet the unique needs facing public entities and ven-
dors/manufacturers servicing this market. For more information, call 800-883-1199.

            345 Miron Drive * Southlake, TX 76092 * 800.883.1199 *

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