Risk management - central government borrowing - inflation risk - bonds.
A bond vigilante is a holder of long dated central government debt that sells - or threatens to sell - their holdings as a response to increased inflation risk or credit risk.
If domestic inflation were to be higher, then the redemption value of the long dated debt would be lower, in real (inflation adjusted) terms.
The longer dated the debt, the greater the effect on real terms values.
Selling bonds in this way results in their prices falling, and the cost of borrowing for the government to rise, expressed in rises in the yields on government debt.
- Bond vigilantes mean business, governments better beware
- "The sight of Britain's new finance minister shredding up his leader's economic policies on Monday [17 October] illustrated something very clearly - bond market vigilantes are back, they are bold and governments had better pay attention.
- It took just three weeks for markets to force the UK, the world's sixth largest economy and issuer of one of its reserve currencies, into its screeching U-turn...
- 'It is really not the right time to experiment with fiscal policy,' AXA chief economist Gilles Moec said about the UK's moves, assessing that Monday's U-turn may have appeased 'the bond vigilantes for now'.
- The term, bond vigilantes, refers to debt investors imposing fiscal discipline on profligate governments by forcing their borrowing costs higher."
- Reuters - 17 October 2022.
- Credit risk
- Fiscal policy
- Inflation risk
- Real terms
- Reserve currency
- Risk management