In recent years, much has been blamed on so-called ‘bond vigilantes’ – financial hotshots said to be responsible for toppling leaders and dictating policy by selling – or threatening to sell – government bonds.In Britain, these supposed vigilantes are widely credited with bringing down Liz Truss as prime minister. And they are now said to be poised to pounce on Andy Burnham, as concerns about a spendthrift Labour government push the UK’s borrowing costs to their highest level since the 2008 financial crisis.Unlike their crime-fighting namesakes, bond vigilantes punish governments they regard as fiscally irresponsible.The term was coined by American economist Ed Yardeni during Ronald Reagan’s presidency in the 1980s to describe investors dumping US Treasury bonds in protest at Federal Reserve policies they believed were inflationary.Selling bonds drives their prices down, which in turn drives yields, the effective interest rate paid on them, up, making it more expensive for governments to borrow and often forcing a policy rethink.
The vigilantes reappeared during Bill Clinton’s presidency when yields on US ten-year Treasuries climbed above 8 per cent, triggering what was named the Great Bond Massacre of 1994.It prompted Clinton’s adviser James Carville to remark: ‘If there was reincarnation, I’d like to come back as the bond market. You can intimidate everybody.’Truss discovered that reality after her September 2022 mini-Budget sparked a sell-off in UK government bonds, known as gilts, sending yields close to 5 per cent and triggering a crisis in the liability-driven investments held by pension funds, prompting an emergency intervention by the Bank of England.And it is why Burnham received such a roasting in September last year after claiming Britain should not be ‘in hock to the bond markets’, sending 30-year gilt yields to a 27-year high.The tough task facing Andy BurnhamNow Burnham is Prime Minister, he has softened his language, promising to use ‘any flexibility’ within the fiscal rules. But the market is unconvinced. Rising oil prices have reignited global inflation fears, pushing the UK’s ten-year borrowing costs to about 5 per cent, their highest since 2008.Thirty-year yields reached 5.8 per cent, their highest since 1998.If Burnham believes nuance will placate the bond vigilantes, many think he is mistaken. Anthony Peters, a self-described ‘old bond dog’, argues that in fact there is no such creature as a bond vigilante, adding: ‘It’s far more dangerous than that. The whole gilts market is the vigilante. That’s its job.’The vigilantes, he says, exist only in the minds of those who believe traders conspire against governments. But, he says: ‘It’s got nothing to do with being in hock to the markets. It’s maths. If investors think something bad will happen, they sell.’Britain now borrows at higher rates than Portugal, Italy, Greece and even Morocco. US bond yields have also soared over worries about America’s budget deficit, triggering the controversial move by US Treasury Secretary Scott Bessent to intervene with a bond buy-back programme aimed at lowering borrowing costs.However, fighting against the market almost never works – long-dated yields have shot up again.Yields matter. Servicing the UK’s £3trillion national debt costs £120billion a year. So each upward twitch in yields adds to the burden on taxpayers. Keeping yields low is vital, not only to refinance existing debt but for new borrowing. Podcast: Why the UK has a bond market problem Turmoil on global bond markets has sent yields soaring on major countries' debt but the UK is suffering more than its rivals.So, what’s going on with the bond blowout? How bad is it? Why does the UK pay more to borrow than similar countries? And why is it bad news for the Budget and our finances?On this episode of the This is Money Podcast, Georgie Frost, Helen Crane and Simon Lambert discuss the bond market, explain what's going on and why it matters to you.Press play to listen to the episode on the player above, or listen (and please subscribe and review us if you like the podcast) at Apple Podcasts and Spotify or visit our This is Money Podcast page. Why this isn't a Liz Truss moment... yetYet if yields are higher than in the Truss chaos, why is there no similar panic? Chris Fellingham, dubbed the City’s gilts king after 40 years of trading, says the market has priced in catastrophe.‘We are at an impasse until John Healey’s first Budget. The market is treading water,’ he says. ‘Despite all the damaging Budget leaks, we don’t know what they are planning. It’s a game of wait and see.’Chris Fleming, formerly of Japanese bank Nomura, agrees saying: ‘The markets decide. Right now, no one wants to buy ten-year gilts, let alone 30-year paper. Maybe if yields move closer to 6 per cent they’ll have a nibble. Investors lost confidence after Reeves’ first Budget, and it’s not returned.’He says we’re seeing a slow-motion crash: ‘Investors don’t see signs of growth. They see only the politics of envy. Bond markets are the best intelligence source you’ll get for where a country’s heading.’Britain is in a fiscal trap, argues George Cooper at Equitile Investments, saying: ‘Burnham’s trapped by deteriorating public finances, with every extra pound of spending widening the deficit. 'War bonds are sticking plaster. Underlying the problems is that we’re below population replacement levels. Who will pay for future debt?’Markets are also increasingly worried about ‘fiscal dominance’ –the point at which investors no longer believe central banks can control inflation through higher interest rates without rendering governments insolvent. Faced with that dilemma, Cooper argues, policymakers will ultimately tolerate higher inflation.
