Are the bond market vigilantes coming back to the US?
We saw the bond markets in Greece and Ireland fall prey to the bond vigilantes. These are institutional investors who aren’t afraid to sell sovereign credits. In the early ’80s we had bond vigilantes in this country. They weren’t as concerned about credit risk as they were about interest rate risk. With Paul Volker running the Fed, interest rates doubled from 7% to 14% in a short period.
The Treasury Bond contract moved down the intranet-day limit on three successive days. There were rumors that a prominent bond trader had been caught on the wrong side of the move and had cut his own wrists.
In 1994 bond market investors sold Treasury Notes so that their yields went from 5% to 8% over 12 months. President Clinton expressed significant frustration that his policy initiatives were held hostage by a bunch of bond traders. Those were bond vigilantes, presiding over 20%-30% moves in the market.
By contrast, the current sell-off, while significant, seems tame by comparison. Yields have risen by 1% the past six weeks which is serious, but it doesn’t impair any of the Administration’s policy goals, which is the real test of a vigilante.
Bond vigilantes have been with us a long time. But the latest interest rate move seem more like a minor skirmish, rather than real vigilante action.
Douglas R. Tengdin, CFA
Chief Investment Officer
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