Bond Vigilantes Return Amid Persistent Inflation: Should Investors Be Worried?

investing.com:

The term “Bond Vigilantes” is a nostalgic twist on an old-west theme. In the nineteenth century, the American West formed self-appointed groups, or committees, to seize the duties of law enforcement and judicial authority in situations when citizens found law enforcement lacking or inadequate.

In the bond market, the term “Bond Vigilante” was first coined by Ed Yardeni in 1980 when bond traders sold Treasurys in response to the growing power of the Federal Reserve and its policies on the U.S. economy. (Sound familiar?) According to Investopedia:

“A bond vigilante is a bond trader who threatens to sell, or actually sells, a large number of bonds to protest or signal distaste with policies of the issuer. Selling bonds depress their prices, pushing interest rates up and making it more costly for the issuer to borrow.”

If the “Sheriff” in town isn’t doing their job, the premise is that holders will become “Bond Vigilantes” and “take the law into their own hands.”

Over the last couple of years, the fear of “Bond Vigilantes” has returned with the surge of inflation since 2022. Even Ed Yardeni, the economist who coined the term “Bond Vigilantes” and has regularly predicted their return to the investment landscape ever since, says they’re “saddling up.”

The problem is that the expected return of the “Bond Vigilantes” is flawed as it is based on the premise that those vigilantes have the power to “take the law of monetary policy into their own hands.”

“Shorting government bonds when the central bank is politically aligned with the Treasury is a sure-fire way to lose lots of money. The consolidated government’s balance sheet consists of IOU liabilities that it can manufacture in infinite quantities. Why would anyone think they