Bond Market Vigilantes

Prevents bubbles from occurring and slows the economy, thereby raising bond prices again (= flight to safety) and protecting bonds

Bond market vigilantes are investors who sell government bonds in large quantities to raise bond yields when there is a possibility that bond prices will fall due to concerns about inflation or government fiscal deficits. The term was coined by economist Edward Yardeni in 1984. Some experts believe that Greece and Ireland, which were undergoing financial crises, became targets of the vigilantes.

When the economy is booming, risk-free bond prices fall, so bond investors hope the economy does not improve. If a massive bond sell-off occurs, interest rates rise and the economy does not improve—in other words, they sacrifice themselves

During the Dot-com Bubble

But it did not work during the dot-com bubble. They began to hold out, saying the bubble would burst soon. The Fed kept raising rates, but bond yields did not fall (= why should I take the loss? why should I go out as a vigilante?) The bond market began to turn extremely selfish

Because it was obvious that prices would fall anyway, everyone held on without selling bonds; the phenomenon of dumping bonds after seeing CPI, as happens now, did not appear

US conspiracy theory: by preventing US long-term interest rates from rising (by buying long-term Treasuries), increasing exports to the US, earning dollars again, and then buying long-term bonds with those dollars to lower long-term rates (mid-2000s)

2024-01-04

A term I learned thanks to Managing Director Kim Il-gu
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Topics: Fed
Category: Wiki/Economy
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Published: 2022-10-20

bond market vigilantes