Return of the Bond Vigilantes Sent Shockwaves Around the Globe, by Wolf Richter

Once upon a time, the bond vigilantes kept governments sort of honest. That was long ago. From Wolf Richter at wolfstreet.com:

Deficits didn’t matter – until raging inflation brought the bond vigilantes back to life.

Over the past three weeks or so, we had some spectacular chaos in the United Kingdom’s bond market that then threatened to topple big pension funds that then threatened to spread the damage further into the financial system. In the process, the British pound got hammered to record lows against the US dollar.

This was triggered by the brand-new government’s announcement of the biggest tax cuts since the 1970s, tax cuts for the rich and for corporations, and some extra spending, all of which would have to be funded by selling even more new bonds into a bond market that is already getting eaten alive by 10% inflation combined with way-too-low interest rates, and by a government that is already over-indebted just as economic growth is stalling. And that’s when we saw them for the first time in many many years: the bond vigilantes.

The bond vigilantes can be brutal, and they can be fast-moving, and they can come out of nowhere, and suddenly they’re here, and chaos ensues, and bond prices plunge, and yields spike, and liquidity vanishes, to the point that it threatens the functioning of the bond market, and therefore the functioning of the economy, and it forces politicians and governments to change policies.

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