Historically, "bond vigilantes" referred to investors who actively sold government bonds due to concerns about irresponsible government policies. Earlier predictions suggested that with growing market concerns about America's fiscal outlook and Trump's trade, tax, and spending initiatives, this year should have witnessed significant long-term Treasury sell-offs and a surge of bond vigilantes. However, this scenario never materialized.
From April through early June, markets widely anticipated bond vigilantes would emerge due to concerns that Trump's tariff announcements could trigger inflation, along with financing needs for fiscal deficits from major legislative packages. By late May, JPMorgan CEO Jamie Dimon even warned that bond markets would collapse and regulators would fall into "panic."
Yet reality proved quite the opposite. According to the ICE Bank of America Merrill Lynch MOVE Index, bond market volatility has declined significantly since April. Since May, 10-year Treasury prices have continued rising, with yields falling approximately 40 basis points to 4.14% as of Monday. Similarly, 30-year Treasury prices have also climbed, with yields dropping 30 basis points to 4.76% from over 5% in May. Note that Treasury yields and prices move inversely - declining yields reflect increased demand for government bonds.
Several factors explain why bond vigilantes failed to materialize as expected. These include the Trump administration's willingness to control corresponding Treasury yields by adjusting long-term bond supply, significantly deteriorating summer labor market conditions, and the Federal Reserve entering a rate-cutting cycle.
September data revealed that the U.S. created 811,000 fewer jobs in the 12 months ending in March than previously estimated. Additionally, August job gains totaled just 142,000, while unemployment rose to a near four-year high of 4.3%.
Thomas Urano, Co-Chief Investment Officer and Executive Partner at Sage Advisory in Texas, stated: "Entering midsummer, bond vigilantes were primarily focused on fiscal deficits and White House tax legislation." He added in a phone interview: "But employment data revisions rewrote the script, with market concerns quickly shifting toward slowing economic growth, prompting the Fed to begin cutting rates." He believes bond vigilantes won't return unless employment data rebounds and tariff-induced inflation transmits to markets.
Market fears about tariffs potentially causing severe inflation haven't materialized, while tariff revenues have increased substantially. The Bipartisan Policy Center in Washington estimates that from January through mid-September, the U.S. collected $165 billion in revenue from goods tariffs and specific excise taxes. However, the legality of Trump's tariffs will face challenges, with the Supreme Court scheduled to hear arguments on November 5th.
John Luke Tyner, portfolio manager at Aptus Capital Advisors in Alabama, noted that increased tariff revenue represents "another reason for the fiscal frenzy slowdown we're witnessing," helping ease some market concerns about Treasuries. Currently, 10-year Treasury yields sit at the lower end of the recent 4%-5% range. Tyner believes "the real question is whether we'll maintain this level or move even lower," suggesting Treasury prices may continue rising from current levels.
According to economists Steven Ricchiuto and Alex Pelle at Mizuho Securities in New York, other factors have also limited investors' willingness to sell long-term Treasuries. One key factor is Treasury Secretary Bessent's willingness to finance government borrowing needs using more short-term Treasury bills, thereby exerting downward pressure on 10-year Treasury yields.
Ricchiuto and Pelle wrote in a report that by expressing willingness to limit long-term Treasury supply, "Secretary Bessent knows he possesses this tool, and merely the threat of using it has already proven effective."
They also noted that asset management companies are attempting to outperform markets through "incremental duration bets" rather than "large wagers." Other factors limiting investor sales of long-term Treasuries include declining oil prices.
They indicated that a final consideration is that for many investors, 10-year Treasury yields near 4.25% are already attractive - sufficient to encourage them to "go long the market" absent "serious" inflation acceleration.
Jon Brager, portfolio manager at Palmer Square Capital Management in Kansas, pointed out that foreign investors hold at least 20% of U.S. debt and have been net buyers of all American securities in recent months, including Treasuries, stocks, and corporate bonds.
Meanwhile, Brager added: "We're seeing substantial deficit spending, but Treasury is financing it through Treasury bill issuance, meeting significant market demand for short-term bonds and allowing investors to shorten their duration allocations."
He believes the Federal Reserve may continue cutting rates through early next year, which "will suppress bond vigilante emergence." He also stated: "Even so, we expect the Treasury yield curve to continue steepening amid substantial Treasury supply, reasonable economic growth, and potential tariff-induced inflation reacceleration." In Brager's view, after a "brief protest," "bond vigilantes are simply hiding and waiting for their moment."