Tag Archives: Bond vigilantes

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

Posted on October 19, 2022 | Leave a comment

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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The Return Of The Bond Vigilantes, by Doug Kass

Posted on April 24, 2018 | 1 comment

The bond vigilantes can’t prevent governments from borrowing, but they can make it more painful for them. From Doug Kass at Seabreeze Partners via zerohedge.com:

  • With mounting private and public debt, the U.S. economy is poorly positioned to reach consensus economic growth expectations
  • The Bond Vigilantes are saddled up and ready to make a comeback – and it’s market unfriendly

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” 
– James Carville

In “The Great Bond Massacre” from late 1993 to late 1994, the yield on the US ten year note rose from 5.2% to 8.0% as investors grew fearful about the implications of large federal spending increases.

For the first time in years the bond vigilantes, “a self-appointed group of citizens – the bond vigilantes – who undertake law enforcement in their community without legal authority, typically because the legal agencies are thought to be inadequate” have surfaced – with the ten year U.S. note yield now approaching three percent.

This morning the yield on the ten year U.S. note has hit a new four year high of 2.99%.

As I see, though rates still appear low by historic standards – the sizable climb in debt loads (in both the private and public sectors) and the continued fiscal profligacy – will likely exacerbate the impact on the recent rise in yields by providing a governor to economic growth and by stirring a number of other adverse outcomes:

* Ballooning Deficits and A Large Supply of Treasuries Loom: A $1.2 trillion 2018 U.S. deficit (and borrowing requirement) coupled with $600 billion of the Fed’s Quantitative Tightening means that there will be, according to David Stockman’s most visual phrase, “the bond pits will be flooded with $1.8 trillion of ‘homeless’ government paper.” Never in the history of modern finance has a near decade old domestic economic recovery faced a financing hurdle that represents almost nine percent of GDP. How large is this hurdle relative to history? At the top of the last U.S. economic expansion, the Federal Deficit was 87% lower (at $160 billion) – which represented only one percent of U.S. GDP at a time that the Fed was still buying Treasuries (in 2007 the Fed purchased $15 billion of Treasuries) and not selling them (or letting them rollover without replacing). So, this time around, the flow of Treasuries will represent supply that is nine times larger (relative to GDP) than was the case in 2007.

To continue reading: The Return Of The Bond Vigilantes

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They’re Back—Long Live The Bond Vigilantes! by David Stockman

Posted on January 12, 2018 | Leave a comment

If the bond market has begun a new, long-running bear market, the bond vigilantes will be riding in force. From David Stockman at lewrockwell.com:

Most of today’s stock speculators don’t remember the bond vigilantes and wouldn’t even recognize one in the flesh. They were just too scary to have been a character on Sesame Street.

But last night some strange riders were spotted galloping eastward from China and Japan. While their visage may be somewhat foggy to the uninitiated, the boys and girls on Wall Street are about to discover that it’s not exactly Big Bird swooping onto their playground.

And at precisely the worst time. After all, the 150 Dow point melt-up each day since the turn of the year was fueled by pure speculative momentum. As Heisenberg noted this AM, the S&P 500 has posted one of the longest stretches without a 5% drawdown in recorded history.

Boom

Likewise, the weekly RSI for the S&P 500 is now the most overbought since 1959. That is to say, since the days when the great team of President Dwight Eisenhower and Fed Chairman William McChesney Martin saw to it that the Federal budget was balanced and that the Fed’s punch bowl didn’t linger down on Wall Street when the revilers got too frisky.

Needless to say, back then there were no bond vigilantes, either, because they weren’t needed. UST’s got priced in the bond pits by investors and savers who didn’t cotton to either inflation or fiscal profligacy. And after the Treasury-Fed Accord of 1951, they would have been just plain horrified by any attempt from the Eccles Building to tamper with UST bond prices or the yield curve.

That’s another way to say that the bond market was healthy, stable and efficient because it was driven by real money investors deploying private savings from income and production, not fiat credits issued by the Fed’s printing presses in the manner of QE.

Overbought

As it happened, real money savers were destroyed by Arthur Burns and William Miller during the 1970s. That’s because these two Fed chairman—one cowardly and the other clueless—-bent to White House based political bullying and Keynesian economic advice, which was approximately the same thing.

To continue reading: They’re Back—Long Live The Bond Vigilantes!

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