Bond Vigilante

The term “bond vigilante ” sounds like something out of a James Bond movie, but it simply describes players in the bond market. Ed Yardeni of Yardeni Research, coined the term when he was the chief economit of Prudential-Bache, writing in 1983:
 
“If the fiscal and monetary authorities won’t regulate the economy, the bond investor will.”
 
If there is an inflationary environment, the bond investor (or “vigilante”) will sell bonds unless there is a higher yield on them to reflect that inflation. Governments that issue bonds might not want to increase the yields, but the bond vigilantes force those bond issuers to act on market forces.
 
 
Wikipedia: Bond Vigilante
A bond vigilante is a bond market investor who protests monetary or fiscal policies he considers inflationary by selling bonds, thus increasing yields.
 
In the bond market, prices move inversely to yields. When investors perceive that inflation risk or credit risk is rising they demand higher yields to compensate for the added risk. As a result, bond prices fall and yields rise, which increases the net cost of borrowing. The term references the ability of the bond market to serve as a restraint on the government’s ability to over-spend and over-borrow.
     
Google Books 
Newsweek
Volume 110
October 26, 1987
Pg. 52, col. 1:
By forcing long-term rates higher to compensate for the risk of inflation, these “bond vigilantes” are now riding herd on the U.S. government, argues Prudential-Bache chief economist Edward Yardeni. In effect, they forced the Fed to hike the short-term interest rates last month, tightening monetary policy in ...
 
OCLC WorldCat record
Inside Asia’s whirlwind - Nine of Asia’s movers and shakers discuss the crisis and the future. What is in store for China? How responsible are the Japanese banks? And just what is a bond vigilante?
Publisher: [London : Euromoney Publications,
Edition/Format: Article Article : English
Publication: Euromoney. (May 1998): 49
Database: ArticleFirst
 
OCLC WorldCat record
Money & Investing - Yes, But / The Bond Vigilantes Sleep
Author: James Grant
Publisher: [New York, N.Y. : Forbes Inc., 1918-
Edition/Format: Article Article : English
Publication: Forbes. (September 04, 2000): 158
Database: ArticleFirst
 
OCLC WorldCat record
Where did the bond vigilantes go? Steven Bell asks what happened to the good citizens of the bond market
Edition/Format: Article Article : English
Publication: TREASURER, no. Nov., (2005): 10-11
Database: British Library Serials
 
OCLC WorldCat record
Where have all the bond vigilantes gone?
Edition/Format: Article Article : English
Publication: BUSINESS WEEK -NEW YORK- no. 4177, (May 3, 2010): 44
Database: British Library Serials
   
New York (NY) Times
The Bond Vigilantes Have Moved to Dublin
Strategies
By JEFF SOMMER DEC. 4, 2010
DURING the Reagan administration’s experiment with supply-side economics, the United States budget deficit swelled and bond buyers were appalled. They punished the government by pushing down the price of Treasuries.
 
Ed Yardeni, then an economist with Prudential-Bache Securities, dubbed the informal posse of outraged investors “the bond vigilantes,” writing in 1983: “If the fiscal and monetary authorities won’t regulate the economy, the bond investor will.”
 
Now an independent economist and market strategist, Mr. Yardeni says that over the last few years, the American vigilantes have been asleep at the switch — lulled by the Federal Reserve’s seductive monetary policies.
   
YouTube
Ed Yardeni: “Bond Vigilantes” Get to Work in the Eurozone
Credit Suisse
Published on Sep 6, 2012
“Bond vigilantes” refer to the ability of the bond market to restrain a government’s ability to over-spend and over-borrow. Ed Yardeni coined the term 30 years ago and says they recently returned to install fiscal discipline in the Eurozone.
   
Dr. Ed’s Blog (Ed Yardeni)
Sunday, June 16, 2013
The Bond Yield & GDP (excerpt)
(...)
They learned their lesson and bond yields generally exceeded GDP growth during the 1980s and early 1990s. That was the era of the “Bond Vigilantes,” a term I coined in 1983. They contributed to breaking the back of inflation. As a result, by the late 1990s, they became less vigilant. While they’ve been repressed in the US by the Fed since late 2008, they were back in the saddle again during 2010 and 2011 in the peripheral countries of Europe. But then, ECB President Mario Draghi repressed them over there when he said on July 26, 2012 that he’ll do whatever it takes to defend the euro.
 
OCLC WorldCat record
How Can We Build a Model in Which a Japanese Bond Vigilante Attack Would Be Contractionary?” Daily Focus
Edition/Format: Downloadable article Downloadable article : English
Publication: The Equitablog, (2014-12-08T12:38:01.000Z)
Database: ACI Scholarly Blog Index
Summary:
So the bond vigilantes get a higher real return in the fixed-value foreign numeraire, a higher real return in domestic currency, and a higher nominal return in domestic currency.An excess supply of labor and goods drives domestic nominal prices and wages down until the expected real appreciation of the currency pushes returns high enough to satisfy the bond vigilantes and they cease their capital strike against funding domestic investment projects.In order to reach equilibrium, the value of the currency has to fall farther and faster than domestic prices and wages rise in order to lower the real value of the currency and so set the stage for the real appreciation we need to anticipate in order to be in equilibrium.In order to avoid such supply-side disruption to the market-mediated division of labor, the central bank may respond to such a shock by raising domestic real interest rates to generate a deficient-demand depression in order to moderate the rise in the domestic nominal value of prices and wages, thus moving partway back to case.
 
Reuters
Puerto Rico exposes dearth of bond vigilantes
By Kevin Allison January 7, 2016
The U.S. municipal-bond market is desperately lacking enforcers. Puerto Rico’s debt crisis is the latest example to expose the shortcoming. Foolish financial crowds had better wise up to other danger zones.
 
Since investment strategist Ed Yardeni coined the term “bond vigilantes” in the 1980s, it has become somewhat accepted wisdom that if public officials are unwilling to rein in spending, markets will do it for them by making it pricier to borrow. That failed to happen in Puerto Rico.