January 2, 2025
By Peter Bower
“Bond vigilante” is a term coined in the 1980s for traders and investors who drove up interest rates at the slightest sign of increasing inflation. Any policy proposal or lack of restraint by our government was immediately met with actions that drove interest rates higher. It might be the mass selling of longer-dated bonds and/or the refusal to buy offerings at current interest rates. Higher and higher rates were the result.
Recently, the Bull and his partners have observed some of the same reactions to our current inflation rate which has been difficult to bring down to the two percent Federal Reserve target. In addition, policy proposals, such as broad increases in tariffs, and further tax cuts for certain constituencies are being met with resistance. The result is that longer-term interest rates have been creeping up.
It may turn out that the bond market becomes the governor of profligacy and bad policy that politicians will not provide. If government debt becomes shunned, then politicians will have little choice but to modify their behavior and policies. After all, no one can make investors invest at rates they feel do not give them an honest return. The free market will protect itself and punish bad behavior. We will see! In the meantime, avoid investments in long-dated bonds.
-The Lonely Bull
