The return of the bond market vigilantes

James Carville, Bill Clinton's 1992 campaign strategist, is reported to have said, "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."

This quote highlights the power of markets, even over politicians.

The bond market can push around politicians because the decisions of millions of investors can raise or lower interest rates, raise or lower currency values, and push politicians into a corner where they have to change their tune.

Some see this as a dark and mysterious power run amok, but this simply is not true.

The bond market is the largest market in the world in dollar value. It does not consist of a few powerful individuals or organizations, but of millions of investors making independent decisions. When the bond market pushes politicians around, it's because there are so many people in agreement with each other (and disagreement with government) that prices move very far in one direction.

That's not a conspiracy; it's a groundswell.

The bond market vigilantes are not an organized group, but their individual actions can force change. And, change it in the wind.


The vigilantes have been quiet for several years. With low inflation and high growth, there have been profitable opportunities elsewhere.

But, now that governments of the world have spent trillions getting their economies going and propping up weak companies, governments are again vulnerable to the vigilantes.

Nowhere is this more clear than in Europe, recently. Investors are understandably concerned about the balance sheets and cash flows of European countries, especially Portugal, Ireland, Greece and Spain (dubbed the PIGS).

Worldwide, bond markets have been raising interest rates and lowering the currency values of the weakest players.

This is not a bad thing. In fact, it's quite the opposite.

Like the stock market bashes companies with weak business plans, the bond market bashes reckless countries. Where governments think they can print money and issue bonds without constraint, the bond market brings discipline.

The bond market vigilantes don't cause problems, they react and point them out.

Without them, things would get much worse. Get ready to hear a lot more about bond and currency markets because sovereigns need reigning in.

Be glad they are enforcing such discipline, but stay out of their way. This is no time to bet heavily on currencies or bonds. Unless, of course, you happen to be a vigilante yourself.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.