Bond Vigilantes Continue to Circle
What is a bond vigilante? They are investors who sell off government bonds to protest against official monetary or fiscal policies that they deem irresponsible or inflationary. To this end, they use the sell-off to punish governments by increasing bond yields and thus increasing the cost of government borrowing. The term Bond Vigilante was coined by an American economist Ed Yardeni in the 1980s to describe how bond markets can act as a restraint on government spending and borrowing by creating financial pressure that forces policy changes.
In the first week of this month, global bond markets were hit with a sharp sell-off before pairing losses by the week’s end, and experts advise that lessons learned from the bond markets were that investors were becoming jumpy regarding government borrowing. In the United States, triggers for the jump in yields were attached to a US court ruling which said that many of the tariffs placed on countries by President Trump were illegal, putting hundreds of billions of dollar revenue at risk. This led to lenders holding long-term treasuries to demand higher yields.
Across OECD* (Organisation for Economic Co-Operation and Development) nations gross debt as a share of GDP was 70% in 2007 and rose to 110% in 2023, the rise being responses to the global financial crisis 2007 – 2009, the Covid-19 pandemic 2020 – 2023 and the surge in the price of energy that engulfed Europe after the invasion of Ukraine by Russia on 24th February 2022. Therefore, as government debt piled up, so did the cost of borrowings making debt markets vulnerable to episodes of quick-fire sell-offs as was seen in the first week of September.
*OECD Nations – This is an international organisation committed to democracy and market economies that serves as a forum for its 38 member countries to collaborate, compare policy experiences and find solutions to common economic and social problems, to promote sustainable economic growth and well-being worldwide. Some expert commentators suggest that they are failing on all fronts.
In the United Kingdom the recent sell-offs in the thirty-year long-dated gilt market was an indication of how global investor sentiment had shifted to nervousness about the government showing a lack of fiscal responsibility. It was pointed out by the relevant commentators that the United Kingdom still had sticky inflation issues which is currently the highest of G7 countries. These were just a number of trigger issues that jolted the bond vigilantes into action and no doubt their eyes will be firmly fixed on the autumn budget.
France is equally at the mercy of the bond vigilantes, with commentators wondering just how far politicians can push the bond market. The current deficit sits at 5.4% of GDP with recent efforts continuing to fail. Any new effort will undoubtedly bring the resignation of the next Prime Minister, the latest one, Francois Bayrou, resigned having lost a no-confidence vote. It seems impossible that this current parliament will pass a budget that will lower borrowing costs, meanwhile the current debt sits at 114% of GDP and the 10-year yield on French government bonds has risen to 3.6% which is higher than that of Greece and on a par with Italy (considered the benchmark for fiscal floundering). Sooner or later the far right and the left in the French parliament will have to come to an agreement on lowering borrowing costs, but all the while the bond vigilantes are circling.
The pressure is mounting on leaders to find reliable and credible fiscal answers to the current growing debt pile and the cost of borrowing. In the United Kingdom, pension funds are helping by buying less government bonds, however in the United States the President’s repeated assaults on the US Federal Reserve and his mercurial style of policymaking will keep the benchmark treasury market volatile. Leaders such as Trump, Starmer, Macron and others will have to summon up the willpower to rein in spending otherwise experts expect the markets will impose it for them, something no government would like to see.
