LONDON (Reuters): Concerns among certain investors and policymakers have increased due to high government spending and the growing necessity for large economies, such as the US, UK, and France, to use bond markets to finance their expenditures.

The world's sovereign bond markets have begun to sell off this year, with Britain being targeted.

France's reputation in financial markets has also suffered as a result of its incapacity to implement belt-tightening policies because of political unrest. Additionally, rising U.S.

Treasury yields indicate that investors may be less confident that a new U.S. administration will reduce a large budget deficit.

It makes sense that rumors of Bond vigilantes returning are spreading.

WHO EXACTLY ARE BOND VIGILANTES?

The phrase, which was first used in the 1980s, describes debt investors who try to force governments they believe to be wasteful to exercise fiscal restraint by making borrowing more expensive.

It is applicable to monetary policy as well. If investors believe governments and central banks are not keeping inflation under control, they may demand higher compensation before lending money.

Higher borrowing costs for the government may result in higher lending rates for businesses and consumers, endangering the stability of the economy and financial system if they go out of hand.

WHERE DID THEY GO AND ARE THEY BACK?

After early spending concerns caused Treasury yields to spike, U.S. President Bill Clinton's administration prioritized budget balancing in the 1990s, which appeased bond markets.

Central bank bond purchases in the US and other countries were crucial in lowering the cost of government borrowing in the ensuing decades, especially during the global financial crisis of 2007–2008.

Bond investors now have greater weight, though, as a result of a rise in inflation since 2021, an increase in government expenditure, the epidemic, the spike in energy prices after Russia's invasion of Ukraine, and central banks' retreat from bond purchases.

WHAT ELSE HAS CHANGED?

According to Ed Yardeni, the economist who first used the word in the 1980s, the emphasis now is on the increase in the issue of government bonds, whereas in the 1980s it was inflation.

Despite being sticky, inflation has decreased in many economies, but debt is still rising.
The U.S. budget deficit reached its largest level outside of the COVID-19 pandemic in fiscal year 2024, rising to $1.833 trillion, or 6.4% of GDP. For the first time in modern history, the government debt of the United Kingdom has reached 100% of economic production. The only G7 economy still with a debt ratio below 100% is Germany.

WHERE HAVE THESE VIGILANTES BEEN IN ACTION RECENTLY?

Britain is the most prominent example. Plans to cut taxes and increase borrowing at a time when the national finances were already under strain alarmed bond investors, causing borrowing costs to jump one percentage point in a single week in 2022. Liz Truss, the prime minister at the time, resigned as a result of the policy's forced U-turn.

As worries over global debt continue to dominate the market, Britain's long-dated government bond yields reached new multi-decade highs on Monday.

As political unrest halted efforts to lower the budget deficit last year, the premium that bond investors demand to lend money to France over safer German paper momentarily reached its highest level since 2012.

Emerging markets face pressure too. Brazil's borrowing costs jumped in December while the real hit fresh record lows against the dollar as markets put government spending plans and a wide budget deficit to the test.

SO, THEY REALLY ARE POWERFUL?

History seems to support this, and Yardeni believes that the recent surge in outstanding debt is what gives them their current strength.

From less than $20 trillion prior to the epidemic and less than $5 trillion prior to the global financial crisis of 2007–2008, the amount of U.S. Treasuries outstanding has increased to $28 trillion.

Bond vigilantes, however, haven't yet gained the same level of influence outside of Britain. French politicians sabotaged a belt-tightening budget despite the prime minister's warning that it may trigger a financial "storm," while the U.S. deficit has not decreased despite worries.

However, economists say that bond investors' concerns about the spending plans of the incoming Trump administration are partially responsible for the more than one percentage point increase in U.S. Treasury yields since late September.
However, the