Could Bond Vigilantes Hostage US Policy Makers?

Rising Bond Yields Threaten To Spoil The Party

The skidding US Treasury market is moving oppositely to China’s plunging bond yields (rising bond prices) and also against latest economic trends. Does this signal the return of the much-feared bond vigilantes that patrolled markets in the 1980s, threatening spendthrift governments? Put more colorfully, will America’s incoming Trump Administration face a ‘Liz Truss’ moment? [Named after the short-lived British Prime Minister who lasted briefly in September 2022 before soaring Gilt yields led to her exit.]

The chart below reports the disconnect between the economy and bonds. It is constructed from term structure data, not Fed funds futures, and because it looks at ‘risk adjusted’ policy rates it is likely biased upwards. Nonetheless, it does show how expectations of rate cuts over the next 12 months have slumped despite the obvious roll-over in the pace of US GDP, according to our daily nowcast estimates.