With 2025 just around the corner, the finance realm is preparing itself for the unexpected changes and the new economic status that will arise. Interestingly, voices from the world of finance are echoing an ongoing concern, seemingly much larger than the uncertainty of the upcoming year; the bond vigilantes are back. 

After reviewing, stats show that in May of 2024, the ten-year interest rate was as high as 4.75%. By September, however, it was as low as 3.6%. Today, just under two months before 2025, the interest rate bounced back to 4.2%. Although these changes are troubling, the rumours of the bond vigilantes’ return have been revealed as the real trouble in the investor community. 

But who are those vigilantes? Why are they angry? And what power do they hold over the economy? 

Who Are the Bond Vigilantes?

Bond vigilantes are a group of investors who act as watchdogs in the bond market. They are typically institutional investors, such as pension funds and hedge funds, who closely monitor government fiscal and monetary policies. When they believe that government spending is getting out of control or that inflation is rising too quickly, they will sell off their bond holdings, causing bond prices to fall and yields to rise. This, in turn, makes it more expensive for governments to borrow money, putting pressure on policymakers to reign in their spending.

US economist Ed Yardeni coined the term “bond vigilantes” back in 1983 in a self-published letter presenting his investor theory. In Bond investors are the economy’s bond vigilantes, Yardeni argues that the best investors can discipline governments by selling off their bonds in masses. 

The vigilantes don’t have to sell their bonds as they can significantly alter the borrowing costs. Their commitment to punishing the government for engaging in poor policies pushes them to extreme actions, therefore selling their bonds. 

Why Should Investors Care?

It has been proven difficult to find a real indication of an economic shift caused by the bond vigilantes. Many believe the vigilantes are a rhetorical device that expresses the bond market’s reaction to a harmful policy. Some think that it is simply the threat of a bond vigilante that stirs up the government. 

Regardless, bond vigilantes – whether real or fake – play a crucial role in the bond market, as they help to ensure that governments are held accountable for their economic policies. By keeping a close watch on government spending and inflation, bond vigilantes help to prevent runaway inflation and excessive government debt. If fiscal and monetary authorities won’t regulate the economy, the bond investors will. This can have a direct impact on bond prices and yields. 

Yardeni warns about the vigilantes returning and taking the ten-year Treasury yield, a bond market benchmark, above 5%, a level it hasn’t seen since 2007. This year, the head of Yardeni Research announced that the bond market seems to expect a long-term inflation rise and that it could easily nullify the impacts of another rate cut. 

The United vs Bond Vigilantes 

At the beginning of the year, leading up to the general elections, the United Kingdom received a warning they might be the target of bond vigilantes. The UK is currently operating at a deficit of 2.5% of gross domestic product, risking the country’s financial stability, especially in a world where unexpected events are relentless.

Meanwhile, the United States is facing similar issues. After the election results, the US economy is still in its adaptation phase. Talk of rising fiscal deficits, along with a potential global trade war, higher inflation and surging yields have raised rumours of the bond vigilantes sniffing around. 

For now, the bond market looks vigilante-free, however, politicians should still think twice before promising to spend more money than the government can afford. 

What to Do As an Investor

Whether or not the rumours are true, there is every reason to be protective and cautious about government spending and inflation. Think like a vigilante to avoid being harmed by one.

This means always keeping a close eye on government policy decisions, inflation rates, and bond yields. It also means diversifying bond holdings to reduce the risk of exposure to any one government or sector. Paying attention to the actions of bond vigilantes and adjusting investment strategies accordingly can save investors a lot of money. 

By staying informed and ensuring diversification, investors can navigate the bond market with confidence, even in the face of bond vigilante scrutiny.