Count us in the camp that doesn’t really think there’s such thing as a “bond vigilante”—investors who protest government policies by dumping bonds, forcing policy makers to act.
In the U.S., certainly, huge deficits haven’t brought out the vigilantes at all.
In a note today, Citi argues that what the U.S. is seeing is equity vigilantes, and the firm even offers a definition of vigilante that we can live with:
What really distinguishes a vigilante from a more regular investor? The clearest definition we can think of is that they are policy-makers, not policy-takers. The classic bond vigilante trades (U.S. treasuries in 1980, bank bonds in 2008) were all about taking a position and then, via further price falls, scaring the relevant authorities into adopting policies that ultimately made the trade come right. So it has to get worse before it gets better. Such levels of brinkmanship demand nerves of steel. And even though the eventual outcome in an asset class might achieve vigilante status, money-losing investors probably might not feel especially ferocious at the time.
Well today there are no bond vigilantes in the U.S., but by this definition there are equity vigilantes in the sense that policymakers look to the stock market to guide policy. There’s little doubt that Bernanke and Obama would both like to pursue policies that make stocks rise, and conversely, there’s little doubt that they look to stock market reactions as a judge of whether their proposed strategies are good or not.
What’s more—and this is what the Chart Of The Day Gets to—stocks and bonds have never been as inversely correlated as they are now. So a good policy for stocks (something growthy and inflationary) will be bad for bonds, and vice-versa.
Conversely, outcomes that satisfy bondholders (anti growth, deflationary policies) will be jeered by stock investors.
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