The "Bond Vigilantes," a market force known for driving up government bond yields to protest fiscal policies, have historically impacted economies, from Southern Europe’s debt crisis to Japan’s recent bond market turmoil. In 2022, their actions contributed to the downfall of UK Prime Minister Liz Truss after her ambitious tax cut plans. Now, they have set their sights on the U.S., where Donald Trump’s proposed tax cuts risk triggering a cycle of revenue shortfalls, increased bond issuance, and rising yields. As U.S. Treasury yields reach new highs, experts warn of potential challenges to Trump’s fiscal agenda and leadership amid this financial showdown.
The Bond Vigilantes Target Trump
In 2022, Liz Truss made history as the shortest-serving Prime Minister in British history, lasting just 44 days in office. Behind her rapid downfall were the so-called “Bond Vigilantes,” a group of short-sellers with a knack for shaking markets.
Who Are the Bond Vigilantes and What Do They Do?
The term “Bond Vigilantes” was first coined in 1984 by American economist Ed Yardeni. It describes market forces that drive government bond yields up (and bond values down), effectively acting as a check on fiscal policies they oppose. Their actions, akin to self-styled enforcers, earned them the title “vigilantes.” Truss became their target after introducing ambitious tax cuts aimed at stimulating the economy. Expecting these cuts to lead to increased bond issuance to cover revenue shortfalls, the vigilantes dumped British government bonds en masse. Despite emergency bond-buying interventions by the Bank of England, Truss failed to stave off the sharp rise in bond yields and the plummeting value of the pound.
The influence of bond vigilantes is not a new phenomenon. During the Southern European debt crisis from 2010 to 2012, they dumped government bonds from Greece, Italy, and Spain, exacerbating the financial woes of these nations. Similarly, Japan’s government bonds saw a dramatic surge in yields starting in late 2022, a move also attributed to these market actors.
The U.S. as the Next Target
Now, the United States has caught their attention. Major outlets like The Wall Street Journal are predicting that a second Trump administration could find itself at odds with the bond vigilantes. Trump has pledged sweeping tax cuts, including reducing corporate tax rates to 15%. This has already set in motion a familiar cycle: “massive tax cuts → revenue shortfalls → increased bond issuance → rising interest rates.” As of October 13, 10-year U.S. Treasury yields have climbed to 4.8%, their highest in 14 months.
Experts warn that if the bond vigilantes persist, Treasury yields could rise even further, threatening the stability of Trump’s fiscal agenda. Higher interest costs could force the U.S. government to issue more bonds, creating a vicious cycle of declining bond values and increasing debt burdens. With Trump seemingly unshakable in his confidence, all eyes are now on whether he can emerge victorious in his looming showdown with the bond markets.
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