In 1983, economist Ed Yardeni, coined the phrase "bond market vigilantes," perfectly pairing the swagger of the trading floor with the power of markets to punish wayward fiscal policy. In the 1980s, the market moved interest rates higher in the face of a weak economy. Why? They feared inflation more than economic weakness.
In the 90s, President Clinton, told that the markets would cast a key vote on the credibility of his economic policies, said, "You mean the success of the program and my reelection hinges on the Federal Reserve and a bunch of f---ing bond traders?"
Yes.
No questions markets are powerful. But the term "bond market vigilante" gets the nature of that power wrong.
Vigilantes act affirmatively (OK, illegally) to hunt down bad guys and do justice when others don't want to get their hands dirty. Vigilantes have an agenda.
But the bond market is less like a Clint Eastwood character and more like the town folk in the movie "High Noon." In "High Noon," when the locals find out the bad guys are coming and the Sheriff is outgunned, they don't strap on vigilante masks, they flee.
Gary Cooper is left to fight the bad guys alone.
So it is with markets. When bond traders don't like a government policy, they don't fix the problem, they run to other, better or safer investments. And that drives interest rates higher on government bonds. Markets serve their policing function by leaving bad investments. This forces governments to react.
This is an important difference between a vigilante and a trader. A vigilante wants to save his town. A bond trader might want to see government policy succeed, but that's the sheriff's job. The trader's job is to leave town before the bad guys get there.
Source: http://www.pbs.org/nbr/blog/2010/12/high_noon_and_the_bond_market.html
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