Oh No — the Bogeyman Is Back!

Dear Reader,

An abominable bogeyman… long deceased… may soon come resurrecting from the grave.

This potential Lazarus is the scourge of Washington. It is the dread of Wall Street.

And it may begin menacing both in January.

What precisely is this mighty fee-fi-fo-fum?

The answer is the dreaded bond vigilante. He is the fiend of our ghoulish tale.

Who is resurrecting the horrific bond vigilante to life? And why?

Answers shortly. Yet here I dangle before you a clue: It involves President-elect Trump.

The bond vigilante is being dispatched against him.

Let us first seek an understanding of the thing… its motives… and its history.

What Is a Bond Vigilante?

Wikipedia defines a bond vigilante thusly:

• A bond market investor who protests monetary or fiscal policies he considers inflationary by selling bonds, thus increasing yields.

Economist Ed Yardeni hatched the term bond vigilante in 1983.

“If the fiscal and monetary authorities won’t regulate the economy,” he argued, ”the bond investors will. The economy will be run by vigilantes in the credit markets.”

Do you seek to comprehend his conduct? Then you must first get your hands around bond dynamics.

Bond yields and bond prices exist in a state of antagonistic polarity.

If bond prices increase, bond yields decrease. If bond prices decrease, bond yields increase.

Imagine a seesaw in swinging dynamism — now you understand the price/yield relation.

The Burden of Rising Bond Yields

If the bond vigilante sells his holdings, bond yields increase… and bond prices decrease.

In this instance bonds become a sawdust asset. And no bondholder is willing to hold sawdust.

In protest, the bond vigilantes heave their bonds over the gunwales and into the water — en masse. 

This mass selling sends bond yields spiraling to obscene heights… and bond prices plunging to obscene depths.

Assume the bond issuer is the United States government. That United States government issues bonds — debt instruments — to keep it in funds.

It must ladle out greater interest on the bond as yields increase.

And so debt service becomes an increasingly heavy anchor around Uncle Samuel’s neck.

A conundrum!

The Birth of the Bond Vigilante

The Federal Reserve overheated the printing presses in the 1970s.

Inflation had America by the snout — attaining a dollar-devouring 11% by 1979.

It was during this time that the bond vigilante was hatched into existence.

But Mr. Paul Volcker came on station in 1979. “Tall Paul” elevated interest rates so high he licked inflation by 1983.

The bond vigilantes sank into a long, long hibernation. They re-emerged briefly in the early to mid-1990s.

A certain fellow from Hope, Arkansas — perhaps you recall him — planned to open the national cheque book… and spend money.

But the awakening vigilantes jammed a gun against his ribs. Ten-year yields jumped from 5.2% in October 1993… to 8% by November 1994.

Thus the bond vigilantes forced Mr. Clinton “to scale back an ambitious domestic agenda,” in Mr. Yardeni’s words.

Such was their might, Clinton henchman James Carville reformulated his reincarnation plans:

• 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.

Back Into the Grave

But massive central bank bond purchases following the Great Financial Crisis hammered bond yields down and down (increased bond purchases raise the price and depress the yield — recall the swinging seesaw).

Inflation was reduced to a ridiculous rumor. And the bond vigilante went permanently upon the shelf — or so it was believed.

By July 2016, 10-year Treasury yields plunged to a record low 1.37%.

By July 2020, 10-year yields would plummet, under impossible pandemic pressure… to an inconceivable 0.53%.

Yet the pandemic occasioned the greatest monetary and fiscal spree ever witnessed.

In its wake followed reports of bond vigilante sightings. Yet the sightings proved phantom.

In October 2023 the bellwether 10-year Treasury note yielded 4.92%.

Today the identical 10-year Treasury note yields 4.17%.

Yet rumors circulate that the bond vigilante is prowl… and poised to pounce.

They Hope Bond Vigilantes Sabotage Trump

Let us revisit our original Who is summoning the horrendous bond vigilante to life? And why?

The answer is President Trump’s political foes. They intend to unleash the bond vigilante against the incoming president.

Why? To sabotage him, to hagride him, to hobble him.

Impeachments failed to undo him. “Lawfare” failed to undo him. Would-be assassins failed to undo him.

He is president once again.

Yet his foes hope the bond vigilante succeeds where others failed. MSNBC:

• Veteran Wall Street strategist Ed Yardeni cautioned that investors in U.S. bonds could play a critical role in forcing the incoming Trump administration to back down from its plans for an all-out trade war with everyone from China to Mexico and Canada.
• Reviving a term he first coined in the 1980s, Yardeni warned that “bond vigilantes” could take action if Trump’s plans go too far.

How It Would Work

Here are the mechanics of sabotage:

• Wall Street analysts point to ways in which Trump’s plans to dramatically disrupt the federal government and foreign trade could backfire on him.
• If bond traders start to think that deficits are getting too high due to Trump’s tax cuts and inflation is going to make a comeback due to his tariffs, they could get antsy. If they start selling, the government has to raise interest rates to compensate, borrowing gets more expensive, the Federal Reserve starts worrying more about inflation, local chambers of commerce start nervously calling up their Republican representatives — and suddenly Trump doesn’t have quite so compliant a Congress.

Thus you may have a presidential agenda strangled to death in its crib. The bond vigilante would do the strangling:

• Trump has grand plans to remake America… But… he will face a rule of politics as ironclad as Newton’s third law of motion: Every action he takes will have an equal and opposite reaction somewhere else.
• The first response to watch may very well be from vigilante bond traders. 

If Trump Can Survive Bond Vigilantes, He Can Survive Anything

I very nearly pity the poor fellow.

He has seen off impeachment. He has seen off prosecution. He has seen off assassination.

He may next confront the formidable bond vigilante in all its genius.

Can President Trump see this ogre off?

If he can… it would convince me that no conceivable menace can conquer him.

He will well and truly be invincible.

Regards,

Brian Maher

for Freedom Financial News