What’s a bond vigilante? Ed Yardeni, Bill Clinton och Björn Wolrath
With national contests from the US to India,
incumbents seeking another term will be tempted as always to ramp up public spending before the vote.
That puts them on course to collide with the global bond vigilantes
Battles are most likely in nations where leaders are under the heaviest pressure to increase spending, because their own popularity is so low.
The rub: that is most countries.
from India and Bangladesh to South Africa and the US
Ruchir Sharma FT 6 November 2023
https://www.ft.com/content/1da8766c-d8f8-4858-91a3-8c2f9221772a
The writer is chair of Rockefeller International
Bonds are not in normal times
Does the supply of bonds affect the level of yields? The answer is a firm no, according to a popular theory of bond valuation.
This argues that long-term interest rates are just the average of future short-term interest rates — which is a good description of the yield curve in normal times.
But that is not the state of the world we are in today.
Quantitative easing programmes ...
This has significantly distorted major bond markets.
Term premia collapsed across the world. This is the extra return for investors for taking on interest rate risk over longer periods.
On the demand side, major central banks are now in quantitative tightening mode
Yields are determined by the marginal buyer, which will now be the price-sensitive private sector.
In 2022, US government bonds recorded their biggest losses since 1871.
Tomasz Wieladek chief European economist at T Rowe Price FT 23 October 2023
https://www.ft.com/content/b0f842ad-7ec5-45b8-9752-a6ae0252b36f
Röd öppning - Red Opening 23 October 2023
Bond vigilantes
When interest rates were near zero and the Federal Reserve was buying tens of billions of dollars’ worth of Treasury bonds every week, the prospect of ballooning US budget deficits seemed manageable.
But with the official interest rate soaring past 5%, the price of the benchmark 10-year Treasury bond tumbled, driving its yield to the highest in 16 years. Experts say these forces are empowering so-called bond vigilantes — the banks, hedge funds and insurers that seek to enforce fiscal discipline by driving up government borrowing costs.
The phrase was coined in the early 1980s by economist Ed Yardeni
Can bond vigilantes affect markets and policy?
Yes. They did so in the early 1990s in Sweden, where the government was running a budget deficit of 13% and the economy was barely growing.
Bjorn Wolrath, who controlled $6.2 billion of investments as general director of Stockholm-based insurer Skandia Group, got the posse rolling in July 1994 by pledging not to buy “a single Swedish bond as long as the Swedish government doesn’t have a trustworthy policy aimed at reducing its deficit.”
Clinton was stunned to find himself at the mercy of the bond market, according to journalist Bob Woodward’s book, “The Agenda,” which quoted Clinton raging to aides, “You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of f—-ing bond traders?”
The impact of the bond selloff on the politics of the time prompted Clinton political adviser James Carville to say in 1993: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
Mark Gilbert and Ye Xie Bloomberg 13 October 2023
Kommentarer