Halloween Horror: The Return of the Bond Market Vigilantes

Estimated Reading Time: 3 minutes

For those who make their living on Capitol Hill and at 1600 Pennsylvania Avenue, the real horror this Halloween won’t be the kids in their Halloween costumes or the scary movies in the cinema — it will be (and is) the return of the Bond Market Vigilantes.

Simply put, the Bond Market Vigilantes are a politician’s worst nightmare.  Politicians make their living collecting bribes dressed up as campaign contributions from lobbyists of every ilk.  In return, the politicians pass legislation expressly designed to line the pockets of the various interest groups that the lobbyists work for.  Oftentimes, the legislation itself is drafted by the lobbyists’ lawyers.  Some interest groups are so large — for example, senior citizens collecting Social Security and obtaining their health care through Medicare — that even lobbyists are not particularly needed to keep the money flowing.  When a vote to reduce Social Security entails political suicide, the situation more or less takes care of itself.

In other words, virtually the entirety of the Capitol Hill kabuki show involves keeping the U.S. Treasury’s money flowing to the country’s most important and influential interest groups, be they a single corporation, an entire industry such as Big Pharma, or a large segment of the population.


But what happens if something occurs that imposes highly undesirable consequences when the existing money flows continue or, God forbid, increase?  That’s where the Bond Market Vigilantes come in.  During the week of March 31, 2020, the thirty-year U.S. Treasury bond contract on the futures exchange traded as high as 191.688.  In the most recent week that ended on October 27, 2023, that same contract traded as low as 107.125.  That’s nearly a 50 percent drop from the high in one of the world’s most important securities.  It’s a drop that occurred over three and one-half years, so we are not dealing here with a flash in the pan or a sudden panic but rather a considered judgment by some of the world’s most respected and intelligent investors that leaving money in the hands of the United States Government for a long period of time (say, 30 years) is a very, very bad idea.

And why would it be a bad idea?  Not because the U.S. Treasury cannot be relied upon to pay those 30-year bonds in full at maturity in fiat currency.  The Federal Reserve can print whatever quantity of fiat currency (at this point in the article I am going to cease calling it “money”) it wants to, there’s no doubt that the Fed will manufacture out of thin air a sufficient quantity of fiat currency “I-owe-you-nothings” (as the great central banker John Exter called the Treasury’s greenbacks) to pay maturing 30-year Treasuries at their full face value.

No, the problem is not full payment at maturity, the problem is what will those wheelbarrows full of greenbacks will be worth when the 30-year Treasuries finally matureThe judgment of those investing in 30-year Treasuries — we can now call them the Bond Market Vigilantes — is that those wheelbarrows full of U.S. fiat currency being rolled out in 2053 won’t be worth a whole lot.

The Bond Market Vigilantes are a nightmare for Washington’s politicians and bureaucrats for a variety of reasons, the most important of which are the profoundly negative effects on the Federal Government’s budget, the financial markets and ultimately the economy itself.  Higher interest rates mean more fiat currency going to pay interest (obviously) and less being available for the various interest groups feeding at the Federal Trough.  Now, although it’s true that even more fiat currency can be printed to both pay the interest and pay the interest groups in full, that would just make the Bond Market Vigilantes even more anxious to exit 30-year Treasuries and thus would force long-term interest rates even higher.


High-interest rates have a depressing effect on both the financial markets and the economy.  If those rates move high enough, both would be crushed, and nothing makes an incumbent politician more likely to get voted out of office than a crashing stock market (“Sir, your IRA is now worth only half of what it was worth last year”) and an economy in depression (“Mr. Smith, we lost half of our customer base, so your services are no longer required”).

Three and one-half years of declining Treasury Bond prices is a long time, folks, and it should be obvious to all those not blind that we are now in a new era where rising long-term interest rates and falling prices of U.S. Treasury securities imposed by the Bond Market Vigilantes constitute a slowly-tightening noose around the necks of politicians long used to spending like drunken sailors.

Collectively, the Bond Market Vigilantes represent a “new sheriff in town.”  It’s not for nothing that Democrat strategist James Carville stated that if he died and were reincarnated, he wouldn’t want to come back as president or pope — he would come back as the Bond Market.


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