Return Of The Bond Vigilante

The layering of QE on the strong disinflationary forces of technology, globalization, and labor’s weakened position neutered the bond vigilantes. While QE is being gradually withdrawn from a stronger US economy, it continues in both Japan and the euro area. With low inflation and the implicit fiscal support it offers, the bar to withdrawing QE in both places is high. A global bond market will, therefore, continue to feel the effects of QE despite its gradual withdrawal in the United States.

Inflation is key to resurrecting the bond vigilante. We don’t know quite how long the structural disinflation trend of the past two decades will last. It is unlikely to persist if globalization goes into retreat. We may be at one such inflection point as the backlash against free trade and the cross-border movement of labor gains traction. Policy could also force greater so-called onshoring of production through tax incentives and could make it costly to rely on international supply chains.

If the disinflation trend morphs into inflation, it would force global QE withdrawal. And that would peel away the implicit fiscal support that has been an unstated but nevertheless powerful feature of QE. The entire chain of events that pushed the bond vigilantes close to extinction would reverse. Google searches would start spawning reports about the bond vigilante, and fiscal hawks would emerge from Congress’s woodwork. Governments would then feel the pinch, and it would profoundly transform the politics of fiscal policy.


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Disclaimer: Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.

RAMANA RAMASWAMY is a distinguished academic visitor at ...

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Norman Mogil 1 year ago Contributor's comment

Could the bond vigilantes be operating in reverse? Where the low rates,low term premium signify that monetary policy is too tight ( a la Milton Friedman's argument) and growth is too low?