Bond Vigilantism – Fact or Fiction?

Bond yields rise and fall. But every time they rise, it does not mean bond vigilantes are on the prowl.

A bond vigilante is an investor or cadre of investors who protests against monetary or fiscal policies considered inflationary by selling bonds, thus increasing yields. The resulting rise in yields puts pressure on the financials of the governing body forcing them to deliver more appropriate anti-inflationary measures. It’s a popular investment theme which rings true to almost anyone worried about government incompetency – and, from time to time if not most the time, who doesn’t worry about our incompetent government?

However, the term also connotes violence and destruction suggesting caution for investors worried about losing money. That is, hearing about bond vigilantes violently taking over the financial markets can lead investors toward risk aversion. Popular themes associated with bond vigilantes are expectations of surging bond yields, rising debt service burdens faced by the government and even the possibility of a government default or bankruptcy. Vigilantism on Wall Street sure sounds scary and it has distinctive bearish undertones.