The New Vigilantes

In the ‘80s and ‘90s, a new term was coined: bond vigilantes.

Bond vigilantes were traders who would sell out of government debt at the least hint of inflation. They pushed Treasury yields up from 7% to 10% in 1987, when the stock market crash brought yields back down. They attacked the Clinton stimulus program, concerned that the government’s deficits would crowd out other borrowings.

Tom Wolfe dubbed these folks the “Masters of the Universe.” What happened to them?

US bond markets seem positively docile even though the Treasury is borrowing a cool $100 billion a month. Short yields are almost zero, and longer yields are around 3 ½ percent. So where did they go?

One place is into the credit markets. They pushed the cost of Bear Stearns debt up 4% before they Bear was bailed out. The same thing happened to Lehman before they failed, and is happening to Greece and Iceland now. It seems that the bond vigilantes have become credit cops, spanking companies and governments when their fiscal policies seem irresponsible.

They may not be elected, and their only loyalty may be to their profits. But they can tell us something about a country’s or company’s finances. We would do well to listen.

Douglas R. Tengdin, CFA
Chief Investment Officer
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