Bond Vigilante is a market participant (investor or trader) who
a) or threatens to sell bonds;
b) either aggressively sells bonds;
c) either refuses to buy new bonds in protest or in connection with disapproval of the policy of the issuer of these securities.
Usually the term "Bond Vigilante" is used in the context of dissatisfaction with the monetary or fiscal policy of the government, when it, in the opinion of the bond fighters, behaves wastefully. Due to the inverse correlation between the price of securities and their yield, a significant dumping of bonds by bond vigilantes leads to a sharp drop in their price and a significant increase in yield. This puts pressure on government borrowing rates.
The term was coined by Ed Yardeni in the 1980s. So, while the inflation was growing during this period, the policy of the US Federal Reserve remained "dove". The bond fighters believed that rates should have been much higher in order to reduce the rate of inflation. The massive dumping of Treasury bonds raised the market rates. The Fed soon followed the lead of the vigilantes and resorted to more hawkish policies.
Some consider bond vigilantes as speculators, others see them as a necessary deterrent to a government that is wasting funds.
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