Donald Trump, Brexiteers and other populist politicians mean market appeasers have replaced ‘bond vigilantes’ – for now
- Markets once punished fiscal recklessness, but since the 2008 crisis they have increased their tolerance for deficits. This dangerous situation means the return of ‘bond vigilantism’ would be welcome
Remember the “bond vigilantes”? These were the bond traders who wielded significant influence in markets in the two decades leading up the 2008 financial crisis. Averse to fiscal profligacy, they punished governments whose finances were deemed to be on an unsustainable path by driving up their borrowing costs.
The power of these investors was captured by James Carville, former US president Bill Clinton’s political adviser, who joked that he would like to be reincarnated as the bond market, because “you can intimidate everyone”.
Yet, ever since the world’s leading central banks launched their quantitative easing programmes to help stave off deflation and depression, driving down interest rates and distorting asset prices, the bond vigilantes have become an endangered species.
However, recently, a new type of investor has emerged. The market disciplinarians of the pre-crisis years have been supplanted by market appeasers.
One of the most striking developments over the past few years has been investors’ willingness to tolerate, and even show a preference for, populist and fiscally irresponsible politicians.