Vigilantes

Vigilantes are not something one ties to the boring old bond market very often.  However, a well-known economist, Ed Yardini, coined the term back in the 1980s when bond market investors protested against what they perceived as inflationary or fiscally irresponsible government policies.  They could be causing a stir once again. 

Fixing a $36 trillion deficit is no small feat, but that is what America’s Congress is setting out to accomplish.  While a bill squeaked out of the House of Representatives and is now in the hands of the Senate, it appears the solution thus far is to just print another $4 trillion by growing the debt ceiling.  It might seem tempting to conjure up more money to paper over fiscal gaps, the reality is that printing money without corresponding economic growth leads to inflation, eroding the value of the dollar and potentially undermining the very foundation of the economy.

Credit markets are a clear barometer of fiscal health, and lately, they’ve been flashing warning signs.  As the federal government’s appetite for borrowing grows, investors demand higher yields to compensate for the perceived risk, pushing up bond rates.  This, in turn, ripples through the economy, driving up mortgage rates and making it more expensive for everyday Americans to buy homes or refinance existing loans.  Although conversations with those looking for a haven in certificates of deposit (CDs) suggest that rates aren’t rising as quickly as expected; banks are likely to explain this interest rate differential as exercising their need to juggle risk assessments and funding needs.

Ultimately, the solution to a massive deficit is neither quick nor painless. It requires a combination of disciplined spending, thoughtful tax policy, and a commitment to long-term economic growth.  While printing money can provide temporary relief (e.g., America’s economic comeback shortly after the covid-19 era was one of the fastest), it’s a dangerous shortcut that risks much greater pain down the road.  The current trends in bond and mortgage rates are a sobering reminder that the markets, unlike politicians, demand real answers, not just creative accounting.  As we look to the future, vigilant, sustainable solutions that restore confidence without sacrificing prosperity may be the only way to keep vigilantes at bay.