I am sure that with all this talk of haircuts, bond traders will be very carefull about where they put their cash. Intrest rates are very low in even the highest bonds, and if there is a chance of you loosing your capital or even a large part of it you should be looking for a much greater reward than what is currently on offer, any lose will take a long time to make up at current levels, so I expect a culture of principal protection to be the order of the day.
this Play still has many chapters to go, and I would not be suprised to see all interest rates going up, as inflation seems to be coming along very nicely.

The USA seems taking a few sensible steps (RE the deal Obama struck with republicans) and in 2011 may take more (i.e. curb the medium-term deficit). That will not be the direct source of crisis.

With the USA deliberately devaluing the dollar, the emerging economies will definitely be under pressure. There will be either tightening of money and revaluation of currencies - meaning lower global growth; or a big protectionist quarrel with the USA. I'd bet on the former, the latter is so scary that even China will relent and let the Yuan rise slightly.

Europe has taken a different path, of immediate deficit reduction, which will be sustainable only if growth remains strong. Since growth may very well slow (see above RE the BICs etc), the European bet is quite risky. Europe is definitely a source of risk, especially the periphery of the Euro-zone.

Most likely scenario, then:

USA shows moderate growth, somewhat improved unemployment figures, and deals (tentatively) with its deficits in 2011.
Emerging economies show growth, yet cooling down from this year; successfully avoid a trade war with the USA; carefully re-value; and carefully tighten money.
Europe shows every sign of becoming a two-speed area. The peripheral countries will spend years getting out of the mess. They may even pull in some of the bigger economies (UK?). A lot of sweat and tears here.
The European instability will have global consequences, felt on Wall Street and Asias bourses. It will shave yet more from global growth, and make investments everywhere more volatile.

My 2 cents.

What odds are the bookies giving?

Here's a look at the deficit accrued by the United States over the first 2 months of fiscal 2011. The total for 2 months alone is larger than the GDP of all but 30 nations:

http://viableopposition.blogspot.com/2010/12/united-states-deficit-is-us...

What will happen when the bond ratings agencies and sovereign bond vigilantes shine the spotlight on the fiscally irresponsibilities of the U.S. or, because it has the world's reserve currency, is it simply deemed too big to fail?

The vigilantes will strike again. Portugal might just be a little appetizer. Spain will be the main course. Just wait until next spring.

Why call bondholders "vigilantes" for attempting to price risk accurately? In many ways, the entire financial crisis comes down to the dishonest pricing of risk. Complex derivatives obscured risk, often intentionally, and government interventions artificially lowered the penalty for miscalculating risk. If anything can save the world's financial system right now, it will be bondholders demanding a return in proportion to the risk they're taking, with no government or derivatives to game the system. Rising bond yields are a breath of fresh air in a world where governments are racing each other to the bottom in a fatal game of monetization of debt.

Have you seen the riots in Greece? Spain is going to be a tough one. Of course the bond vigilantes will be back....this thing is far, far from over. June latest. I jut hope it's not a mushroom cloud.

If you look at the Great Depression, you will see that there were 3 banking crisis from 1929 through 1933.

So it is realy sily of us to think that the 2008 crisis cycle will have only one dark moment (4Q08). Okay, govenrments acted very different this time. But in spite of that, the necessary adjustemtns did not occurred. As long as they don't occurr, and the clock keeps on ticking, we are headed for another September'08 phase.

I even bet this will happen when Spain asks for a bail-out. Cause they are bigger than all other countries that already received a bail-out alltoghether. So yeah, short Europe and Spain, and you'll make money...

What this recession has taught me is that you never really have savings, in a permanent, can't take it away from you sense, until you are dead. You can get out of something, but that just means you have to get into something else. That something else has risks too. Even cash. What is cash, anyway?

These days, it is pretty clear that there is much to get out of, and with inflating away excess debts one way they can be dealt with, long term bonds at low yields are at the top of my list. Finding something to get into is much harder.

When people can come up with a better idea, bond yields will rise.

Bond-Market Vigilantes Are A God Send

Faltering nations that cannot pay their bond interest deserve and need Bond-Market Vigilantes to straighten them out! It's absurd to think that wealthy neighboring countries can keep bailing them out. If a small business person, or major corporation can't meet their expenses, their borrowing costs, if they can get a loan, they need to accept high interest charges due to risk and return financial lending analysis. This is capitalism it work.

Nations, including the U.S. like sissies expect protection from failed budget and operational, fiscal mistakes. Can't exist in this real World. If sovereign nations and the U.S. states or the U.S. Federal Government can't make ends meet, then they deserve to meet the same fate all citizens face - either live within your means, or go broke with high interest rates...but nations cannot expect their cake and eat it too.

Bond Market Vigilantes serve a good purpose. Charge risk related higher interest charges and call a spade a spade. Then, maybe the rest of the nations will get their acts together.

If you're not outraged by stock market manipulation, corrupt and inadequate government spending, fiscal and monetary bad practices and behavior, and you're angry with Bond Vigilantes, then you're part of the problem.

Warmest,
Richard Michael Abraham, Founder
The REDI Foundation
http://www.redii.org

No one has even mentioned the frighting situation with US states, namely Illinois. In the US, the bond crisis will start with states, which will put the federal government in a difficult situation.

The vigilantes never left....

Moodys gave quite the signal for 2011....Portugal, then Spain....maybe Belgium....maybe Italy....maybe France?

US debt will be downgraded as well....this one will be interesting to watch....actually see how the west is going into second gear

Stock market may outperform bonds in the coming two years, just my two cents.

Think about it: too much risk in the bond now such as too low interest rates, every country is trying to devalue its currency that increase the currency risk, possible defaults, etc.

The longer term yields are supposed to go up because they are too many in number to be manipulated by the Financial control of Government in America and elsewhere. It will be the unwanted answer to the overwhelming food and Fuel inflation of 50% to 100% increases that is wreaking havoc to two thirds of the world's population poor enough to be badly affected.

In America grains and meat have doubled in price since 2006. The middle class and poor make decisions of hard good purchases paying bills or life.
In 2008 they choose life. It irritates me to hear Economists wail about the dangers of deflation when today's unspoken but purposeful inflation of sustenance necessary for life is flying through the roof just to fuel the stock market.