Yardeni Says Bond Vigilantes May Return After Virus Crisis Fades
Yardeni Says Bond Vigilantes May Return After Virus Crisis Fades
(Bloomberg) -- The market veteran credited with coining the term “bond vigilantes” says there’s a chance they could make a return in the aftermath of the coronavirus, after being largely absent for decades.
Government debt in most developed nations has seen a powerful rally the past two months as the deadly epidemic throttled economic growth. But once the outbreak finally subsides, they might start tumbling when investors consider the tremendous amount of stimulus enacted by policy makers, says Ed Yardeni, president and chief investment strategist of Yardeni Research Inc.
“After we get through this GVC we may very well have an inflation scare where the bond vigilantes might very well be able to push bond yields higher,” Yardeni said in an interview. After the global financial crisis spawned the GFC abbreviation, he now sees the world gripped by the great virus crisis, or GVC.
Yardeni even saw a hint that vigilantes were at work on Tuesday, when yields on 10-year and 30-year Treasuries shot up the most since 1982 in the wake of the Trump administration’s proposal for a $1.2 trillion stimulus package. Yields have swung wildly over the past two weeks amid a rush for cash and responses to rapidly shifting economic and policy news.
“I think the bond vigilantes suddenly decided they wanted to speak up and I think that explains why that bond yield went up,” Yardeni said.
Yardeni first used the “bond vigilantes” term in the 1980s to describe the behavior of investors demanding higher returns on sovereign debt in response to governments ramping up deficit spending. By the 1990s, the vigilantes were effectively influencing policy, with the Clinton administration moving to curb deficits.
“I haven’t seen them around for quite some time,” Yardeni said. There was an appearance around the Greek crisis, he said.
More recently, Greece and Italy have seen their yield spreads over European benchmark Germany widen. But central bank asset purchases in many cases have helped to contain rates.
Some predicted an acceleration in inflation after the fading of the GFC, especially given the slowness with which central banks moved to withdraw stimulus, though that didn’t happen. Consumer-price gains remain below targets across the globe.
Yardeni himself doesn’t anticipate an inflation problem, but does see the potential for a “scare” after the virus weakens. He also sees bonds dropping when monetary policy makers move to take back measures that have now ranged from interest-rate cuts and asset purchases to special credit-support programs.
“If the bond vigilantes were free to keep law and order, they would undoubtedly push yields higher here with the kind if fiscal and monetary stimulus we are getting,” Yardeni said.
In the end, they may return “because even the central banks will recognize that they need to at least try to do some normalization of monetary policy to head off inflationary consequences of all the stimulus provided,” he said.
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