NPR. This is The Indicator from Planet Money.
I'm Weyland Wong. And I'm Patty Hirsch.
If you've been paying any attention to the financial news this last week, and who hasn't, then you might have gotten wind of a new posse that's just ridden into town.
Some say they're heroes.
Some say they're villains.
Their name? The Bond Vigilantes.
Snappy. They're a blast from the past who are striking fear into the hearts of fat cat, spendthrift politicians on both sides of the political divide.
They're also, like most of us, big opponents of the hottest topic in the presidential election, inflation.
So on today's show, The Bond Vigilantes.
Where they came from, what they want, and, maybe most important, how you can tell when they're about to ride into action and do what they think needs to be done.
I get tied to the railroad tracks after the break.
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For as long as there's been government, there have been groups of people unhappy about the way that administrations do business.
Lobbyists, interest groups, crowds in the street.
Yes, some of these groups have more leverage than others, but none has as much leverage as the Bond Vigilantes.
The Bond Vigilantes will take a law and order into their own hands if they don't believe that the government's fiscal and monetary policies are doing the job.
This is Ed Yordani.
He's the president of Yordani Research, an investment research firm, and he's been investing and watching Wall Street since 1978.
You are the creator, or the originator of this phrase, Bond Vigilante.
Well, that's guilty as charged.
Oh, he was the first one to make a wanted poster that said Bond Vigilantes.
I didn't even think about that, but yes, absolutely you're right.
Ed came up with this phrase, Bond Vigilantes, to describe a group of big investors, think your pension funds and heavyweight investment firms, who had been battered by inflation in the 70s.
They were worried that the government's fiscal and monetary policies in the 80s could trigger more inflation.
Yes, so they kind of formed this unofficial posse to force the government's hand to keep it from borrowing too much, from juicing the economy too much, all of which, of course, could fuel inflation.
There were three episodes in the 1980s where bond yields rose, GDP growth slowed, inflation came down, and all was well.
Now, I understand that that might sound a little wonky, so allow me to extend this Wild West analogy to explain what this posse of debt -hating investors actually did.
The Bond Vigilantes were, and are, armed with two weapons, a pair of six guns, if you will, holstered on their right hip, bond purchases, and on the left, bond sales.
And we are talking about government bonds here, U .S.
Treasuries, and particularly longer -term treasuries, like 10 -year notes and 30 -year bonds, which, as all loyal indicator listeners know, are sold by the Treasury at auctions throughout the year.
Yeah, and the Treasury, when it sells these bonds, counts on a lot of buyers showing up.
The more buyers, the more demand, and therefore the less interest the Treasury ends up having to pay.
But what if those buyers, especially those big buyers like pensions, endowments, and investment shops like Vanguard and Fidelity, what if they decide not to show up?
Aha! And this is the first of the Bond Vigilantes' pistols refusing to buy.
Not enough people show up for the Treasury auction, and it's a sloppy auction.
Tumbleweeds at the bond auction, Patty.
Tumbleweeds at the bond auction.
You have to have not enough demand for government bonds, the Treasury has to increase interest rates or yields to get people to buy them, which, as Ed says, can get very expensive.
The second weapon is bond sales.
These investors hold a lot of bonds, billions upon billions worth.
What happens when they get nervous about the way the government is handling inflation?
People who actually own these things just willy -nilly call their broker today, they just get me out of these bonds.
I don't want to take any risks.
I want to see how things play out.
The Vigilantes sell their bonds.
Prices fall. Yields, of course, rise.
And now the government is forced to issue any new bonds at a higher interest rate.
Both of the Bond Vigilantes' six guns have the net effect of costing the government more money.
A lot more money. No wonder the Bond Vigilantes have so much power.
But we've been racking up debts for years now.
So why have the Bond Vigilantes decided that now is the time to make a comeback?
Now you've got a new administration in, they want to get certain things done.
But I don't hear the words, cut the spending.
This is Marilyn Cohen, the CEO of Envision Capital Management, an investment firm.
She's been investing in bonds since 1979, almost as long as Ed Yordeni.
She says the way she sees it, the Bond Vigilante posse has drawn up on the outskirts of town.
They're holed up in a cantina, drinking whiskey, and waiting to see how things go down in the new year.
If under the Trump administration spending continues with abandon, then the Bond Vigilantes will say, okay, guys, get on your horses.
We've got to take this into our own hands.
Are you a Bond Vigilante, Marilyn?
I would not. Well, no, it takes an institution far larger than Envision Capital is.
It takes the PIMCOs.
It takes the Black Rocks.
It takes the Treasures of Pension Funds to just say, we're on strike.
We're not buying any of these.
And it can have an effect if they all do it in concert.
Would you like to be a Bond Vigilante?
No, I'd love to. I would love to.
It would make me feel so powerful.
She is saddled up. She's ready to go.
Just waiting for that phone call.
Well, with the national debt standing at roughly $35 trillion, bond holders should feel powerful.
They have a lot of potential influence.
Maybe too much influence?
Ed Yordeni says that's the government's fault for not keeping a grip on spending.
This is what happens when borrowers borrow a lot of money and become dependent on their lenders.
The more a borrower borrows, the more the lenders become influential on the borrower.
And the US has been borrowing a lot more lately.
Still, Ed says, things are looking up.
Inflation's come down.
Productivity looks like it's making a comeback.
So it's conceivable, though, we won't even have a debt crisis that maybe the Trump administration will succeed.
It at least stopping the debt to GDP ratio from going up.
And that would be a big plus.
And the bond market, I think, could live with that.
Fingers crossed. But Trump has talked about some big tax cuts.
They won't be cheap.
Ed says they will likely have to be paid for with new borrowing.
And the tariffs Trump has talked about could also cut into tax revenues.
That would force the government to raise money by going back to the bond market.
And if the government does end up having to borrow more or if the economy begins to stall and the government decides to juice it with stimulus, those bond vigilantes could decide to saddle up.
But Marilyn Cohen says we'll get plenty of warning if they do.
You'll know the bond vigilantes are alive and well when you have one, maybe two treasury auctions in which the auction has a stutter step.
Look at the front page of the Wall Street Journal when it talks about the treasury auction.
Listen to the new snippets on the financial station saying, oh boy, they had an auction today and it didn't go well.
You know, that's the stutter step.
And I think that will be very important.
In other words, keep listening to this show.
We'll let you know if the bond vigilantes are riding this way.
You can decide whether to stay in town and tough it out or run for the hills.
I would run, but I'm so tied up to this railroad track, Patty.
The trains are coming.
This episode was produced by Julie Ritchie with engineering by Valentino Rodríguez Sanchez.
It was fact checked by Sierra Juarez.
Caking count it as the show and the indicators to production of NPR.
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