The View | Bond vigilantes beware: bets against China and Italy are a fool’s errand
If debt markets come under severe strain, vigilantes may ramp up their bearish bets against countries they perceive as vulnerable to tighter financial conditions
Are the “bond vigilantes” about to come out of hibernation?
Ever since the global financial crisis erupted, forcing the world’s leading central banks to shore up financial markets by introducing ultra-loose monetary policies, bond investors who specialise in punishing governments and companies for racking up excessive debts and stoking inflation have been driven out of business.
Central banks’ aggressive programmes of quantitative easing have pushed government bond yields down to historically low levels, distorting asset prices and divesting the vigilantes of their main weapon: a bond buyers’ strike which drives up yields and forces borrowers to mend their ways.
Yet over the past several months, and especially since the beginning of this year, market developments finally appear to be moving in the vigilantes’ favour.
The short China trade has yet to pay off – and has so far proved to be a “widow-maker” akin to the failed bets against Japan’s heavily indebted economy
Last Friday, the yield on the benchmark 10-year Treasury bond rose above 2.8 per cent, its highest level in four years, following the publication of data showing that US wages last month grew at their quickest pace since 2009. The US budget deficit, moreover, is expected to increase to 5.7 per cent of GDP next year – its highest level since the early 1980s – following the enactment of a massive tax cut in December. This is fuelling concerns that inflationary pressures are building at a fast enough pace to force the Federal Reserve to raise interest rates more aggressively than anticipated.
