Bond market vigilantes

Government bond holders were the playground bullies of the 80s and 90s. They would threaten governments and central banks with bond sales to get what they wanted – usually fiscal discipline and lower inflation. Bond vigilantes – a self-appointed nickname – was presumably a way to sound more like Batman and less like thugs. Like everyone who picks their own nickname, they had high opinions of themselves:

“Bond Investors Are The Economy’s Bond Vigilantes.” I concluded: “So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets.”

The guy who coined the name in 1983

These threats worked because selling government bonds causes their price to fall, and the yield – the interest rate – to rise. A government bond is just an IOU from the state, so higher interest rates make it more expensive for governments to borrow. Higher interest rates in government bond markets also usually increase interest rates elsewhere in the economy, slowing down growth. Governments, especially smaller, fiscally precarious ones, had reason to be afraid.

Their reputation was cemented when Bill Clinton’s campaign strategist James Carville said: “I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.”

Quantitative easing mostly killed off the bond vigilantes. Central banks have bought trillions in government bonds since the GFC, making the threat of a bond vigilante sell-off mute. Sell all you want, the central bank will hoover it up.

Or did it? The deluge of fiscal and monetary stimulus, vaccines, and the beginnings of a recovery have some worried about inflation – a concern I’ve discussed previously. Bond holders hate inflation because it erodes the value of their (usually) fixed coupon payment. Because they hate inflation, bond holders tend to be wary of government spending. A world where governments are planning trillions of new spending has the vigilantes reaching their capes and masks. The FT reports:

It’s probably premature. Bond yields have slumped again after reaching record highs last week. The Reserve Bank of Australia brought forward bond purchases in response to yields rising. It’s hard to fight a central bank.

Bond vigilantes bring together history, macroeconomics, markets, and superheroes in a neat bundle. I recommend further reading:


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