Ed Yardeni is the president of Yardeni Research and a four-decade veteran of the study of financial markets.
The famous bond vigilantes are back. They just stopped last week to visit the UK’s new Conservative government led by Prime Minister Liz Truss. They appeared out of the blue and out of the blue.
I first wrote about them in the July 27, 1983, issue of my weekly commentary, titled “Bond Investors Are the Bond Vigilante of the Economy.” At the time, the United States was very concerned that the Federal Reserve would stay the course in the fight against inflation. I concluded, “So if fiscal and monetary authorities don’t regulate the economy, bond investors will.”
The heyday of bond vigilantes was the Clinton years, from 1993 to 2001. Their placement was at the center of the administration’s policy agenda. Indeed, Clinton’s political adviser, James Carville, said at the time: “I used to think that if there was a reincarnation, I wanted to come back as president or pope or as baseball hitter .400. But now I would like to come back as a bond market. You can intimidate everyone.
Today, Prime Minister Truss would do well to heed Carville’s warning!
The UK government is spending a lot of money it doesn’t have, and bond vigilantes – already on high alert due to high inflation – aren’t going to tolerate it. Recent movements have been extraordinary.
In early September, Truss announced a plan to spend billions of pounds to subsidize citizens’ energy bills. Then last week British Chancellor Kwasi Kwarteng proposed a plan to stimulate the economy by cutting taxes and borrowing lots of pounds to pay them. This goes against the Bank of England’s efforts to control inflation.
Fiscal authorities therefore want to put the pedal to the metal at the same time as those responsible for monetary policy put the brakes on. This is a sure reason to have an accident.
And, of course, the currency value of the pound and UK bond prices crashed. On Wednesday, the BoE was forced to say it would buy as much government debt as needed to stabilize the bond market.
Most central banks, including the BoE, have committed to targeting inflation at 2.0%. Despite a slight dip in August, the UK inflation rate is currently 9.8%, down from 3.2% a year ago. Thus, the BoE started to increase its official interest rate from December 16, 2021 and is expected to continue to do so. More deficit-financed spending and tax cuts are sure to fuel the UK’s inflationary fire.
The BoE was created in the late 1600s to be the banker of the English government, supporting and financing its policies without questioning them. In recent years, the BoE and other major central banks have touted their political independence. But in practice, central banks sometimes have no choice but to adapt to the irresponsible fiscal and regulatory policies of their government. Indeed, central banks all have an implicit if not explicit mandate: to maintain financial stability.
We saw it on Wednesday, when the British central bank suspended “quantitative tightening” and announced its intention to buy long-term bonds instead. The BoE’s QT plan – which was due to kick off next week – involved selling off its holdings of government bonds as part of the effort to reduce inflation in the UK. After the pivot, the BoE now plans to buy long-term bonds until mid-October. The central bank said it would make purchases on “any scale necessary” and that the UK Treasury would cover any losses – a pretty stark about-face.
Bond vigilantes were last active in the 1980s and early 1990s. They have remained quiet since then. This is in part because inflation remained remarkably subdued from the mid-1990s through 2020. Additionally, in response to the financial crisis and then the Covid-19 pandemic, central banks controlled bond vigilantes with their zero and negative interest rate. , and quantitative easing policies.
No more: inflation came back in force in 2021 and 2022, forcing central banks to tighten their monetary policies, while fiscal policies continued to run wild. Once the central banks were forced to stop their “big financial crackdown”, the bond vigilantes were unleashed.
Since the pandemic, they are back in the saddle and riding high due to the overly stimulative fiscal and monetary policies being promoted by liberal Modern Monetary Theory fanatics in the US and now supply-side conservative proponents in the UK.
In the name of financial stability, central banks may have no choice but to intervene in the markets to avoid a financial collapse. But now the monetary authorities and the authorities are on notice: the bond vigilantes are back, and they are intimidating.
Ed Yardeni is the president of Yardeni Research and a four-decade veteran of the study of financial markets.
The famous bond vigilantes are back. They just stopped last week to visit the UK’s new Conservative government led by Prime Minister Liz Truss. They appeared out of the blue and out of the blue.
I first wrote about them in the July 27, 1983, issue of my weekly commentary, titled “Bond Investors Are the Bond Vigilante of the Economy.” At the time, the United States was very concerned that the Federal Reserve would stay the course in the fight against inflation. I concluded, “So if fiscal and monetary authorities don’t regulate the economy, bond investors will.”
The heyday of bond vigilantes was the Clinton years, from 1993 to 2001. Their placement was at the center of the administration’s policy agenda. Indeed, Clinton’s political adviser, James Carville, said at the time: “I used to think that if there was a reincarnation, I wanted to come back as president or pope or as baseball hitter .400. But now I would like to come back as a bond market. You can intimidate everyone.
Today, Prime Minister Truss would do well to heed Carville’s warning!
The UK government is spending a lot of money it doesn’t have, and bond vigilantes – already on high alert due to high inflation – aren’t going to tolerate it. Recent movements have been extraordinary.
In early September, Truss announced a plan to spend billions of pounds to subsidize citizens’ energy bills. Then last week British Chancellor Kwasi Kwarteng proposed a plan to stimulate the economy by cutting taxes and borrowing lots of pounds to pay them. This goes against the Bank of England’s efforts to control inflation.
Fiscal authorities therefore want to put the pedal to the metal at the same time as those responsible for monetary policy put the brakes on. This is a sure reason to have an accident.
And, of course, the currency value of the pound and UK bond prices crashed. On Wednesday, the BoE was forced to say it would buy as much government debt as needed to stabilize the bond market.
Most central banks, including the BoE, have committed to targeting inflation at 2.0%. Despite a slight dip in August, the UK inflation rate is currently 9.8%, down from 3.2% a year ago. Thus, the BoE started to increase its official interest rate from December 16, 2021 and is expected to continue to do so. More deficit-financed spending and tax cuts are sure to fuel the UK’s inflationary fire.
The BoE was created in the late 1600s to be the banker of the English government, supporting and financing its policies without questioning them. In recent years, the BoE and other major central banks have touted their political independence. But in practice, central banks sometimes have no choice but to adapt to the irresponsible fiscal and regulatory policies of their government. Indeed, central banks all have an implicit if not explicit mandate: to maintain financial stability.
We saw it on Wednesday, when the British central bank suspended “quantitative tightening” and announced its intention to buy long-term bonds instead. The BoE’s QT plan – which was due to kick off next week – involved selling off its holdings of government bonds as part of the effort to reduce inflation in the UK. After the pivot, the BoE now plans to buy long-term bonds until mid-October. The central bank said it would make purchases on “any scale necessary” and that the UK Treasury would cover any losses – a pretty stark about-face.
Bond vigilantes were last active in the 1980s and early 1990s. They have remained quiet since then. This is in part because inflation remained remarkably subdued from the mid-1990s through 2020. Additionally, in response to the financial crisis and then the Covid-19 pandemic, central banks controlled bond vigilantes with their zero and negative interest rate. , and quantitative easing policies.
No more: inflation came back in force in 2021 and 2022, forcing central banks to tighten their monetary policies, while fiscal policies continued to run wild. Once the central banks were forced to stop their “big financial crackdown”, the bond vigilantes were unleashed.
Since the pandemic, they are back in the saddle and riding high due to the overly stimulative fiscal and monetary policies being promoted by liberal Modern Monetary Theory fanatics in the US and now supply-side conservative proponents in the UK.
In the name of financial stability, central banks may have no choice but to intervene in the markets to avoid a financial collapse. But now the monetary authorities and the authorities are on notice: the bond vigilantes are back, and they are intimidating.