I have added this entry to this blog's glossary at the request of some commentators. I stress that in an area as complex as this, the entry can only be an outline.
The term "bond vigilantes" was almost certainly coined by financial journalists seeking a bit of drama in their otherwise humdrum reporting. The term they invented makes markets sound as if they share plots with Clint Eastwood films.
Supposedly, bond vigilantes are investors who “punish” governments they dislike by selling government bonds and driving up interest rates. As a result, it is suggested that they determine which governments are “responsible” and which deserve market retribution.
There are several problems with this story.
First, who are they?
So-called "bond vigilantes" are employed by some of the world's most prominent financial institutions, including pension funds, insurance companies, asset managers, and banks. These are not heroic outsiders standing up for truth. They are the same institutions that have profited massively from the neoliberal order over the last forty years, and in the course of their routine activities, they buy government bonds because they need safe assets in which to save funds on behalf of their clients. They then sell them again when they get spooked (which appears to happen regularly) or when they can make more money elsewhere. There is nothing noble or democratic about any of this.
Second, what do they actually do?
These traders buy and sell. They speculate on interest rates, inflation and central bank behaviour. And, when they sell bonds in large quantities, the market price of bonds falls. A falling price equals a rising yield (for an explanation, see the glossary entry on bonds). The media interprets that as markets “losing confidence in government policy”. The reality is simply that investors are making a calculated bet that they can profit from forcing up the cost of new government borrowing.
Third, how do they do it?
Traders exploit a system in which governments pretend to “borrow” their own currency from financial markets, although in reality, when a currency-issuing government sells bonds, it is not accessing money it does not have. It is, instead, swapping one form of government money (bank reserves) for another (bonds). But as long as governments maintain the fiction that they depend on these markets to fund public services, the traders hold power. They can create a sense of crisis because politicians are terrified of interest rate rises that they think they cannot control, even though they actually have the power to do so.
How, then, do traders create the impression that they might, instead, be in control? This is where the tools of highly leveraged speculation come into play. Traders do not wait around to see if prices fall. They deploy techniques that can push prices where they want them to go:
- Short selling bonds. Traders borrow bonds they don't own, sell them quickly and hope to buy them back cheaper later. Selling into the market drives prices down, creating the appearance of a confidence crisis.
- Betting through derivatives. Interest rate futures and swaps let traders wager on central bank policy, whilst credit default swaps let them bet on rising default fears, if they exist. These instruments can be leveraged many times over, magnifying tiny shifts in sentiment into large financial consequences.
- Coordinating the narrative. Institutional trades often move alongside media briefings about governments being “reckless”. The market move creates the headline. The headline reinforces the market move. The ethics are decidedly dubious.
- Leveraging every pound. By borrowing repeatedly, a fund with £1 billion can take positions worth £10 billion or more, albeit by creating considerable risk for itself.
The important point is this: none of these activities actually depletes the government's capacity to spend its own currency. They simply increase the price the government agrees to pay to maintain the illusion that it needs the markets' favour, when nothing can be further from the truth.
Fourth, what is their goal?
Profit. Nothing more. The moral language imposed around this activity is theatre. The suggestion that traders are “holding governments to account” is self-serving ideology. If bond vigilantes really cared about economic sustainability, they would not have been silent during the years of austerity that trashed public health, investment and growth. What they want is a world where governments obey the rules that preserve financial wealth over public well-being.
Fifth, why does this matter?
This all matters because the myth of the bond vigilantes has been used to enforce austerity, weaken democracy and undermine public services. Politicians claim that “the markets” will punish them if they spend to meet social and environmental needs, yet the Bank of England has shown that interest rates are not dictated by traders. They are set through monetary policy choices, and during crises, central banks buy bonds simply to keep interest rates down. The supposedly unstoppable vigilantes are always silenced whenever that happens.
Sixth, the real lesson
Bond markets only gain power when governments choose to fear them. A currency-issuing government can always pay for the services, infrastructure and care that society requires. It can always ensure that interest rates reflect social priorities rather than speculators' demands. The idea that markets sit in judgement on democracy is not an economic fact; it is a political choice.
In summary:
Bond vigilantes are not guardians of economic virtue. They are traders exploiting a system designed to give them leverage over democratic decision-making. The only way their grip loosens is when governments remember that they, not markets, are the ultimate creators of the money on which those very markets depend.
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Thanks again for another apposite and accessible article.
Might it be that ghost like power of the bond holders/manipulators also benefits from an excessively manipulative main stream media and an avoidably gullible, under educated and ill-informed public?
What might be the reasons/excuses/purposes of those in elected governmental posts going along with the bond vigilantes aka bond self-seekers?
The public are being listed.
The media is misleading.
The politicians are acting deliberately. Most of all, they are to blame.
First, ‘Vigilante’ implies some organised group of individuals combining to police something. Well, in 40 years of trading government bonds (now, that’s a scary thought) I have only ever observed collusion (in government bonds) once…. and the result was the demise of Salomon Brothers (the biggest bond trading firm) in 1991. In those days the price of misbehaving was getting shut down.
What I do see are investors all of a similar ilk…. and terrified of inflation. It’s an asymmetric risk – we never see huge deflation but do occasionally see substantial inflation. So, not unsurprisingly, we see herd instinct selling whenever there’s a whiff of scary policy making.
The real point is that whilst my bank IS a vigilante for me – it limits my credit and determines the price – it’s not for a currency issuing country. It is not so constrained…. unless it chooses to be (ignorance or vested interest – take your pick).
If it wished, the government could intervene in the bond market and neutralise negative impact. COVID and the Truss/Kwarteng debacle provide ample evidence of this.
Thanks
Very useful and enlightening, thank you. I mention your glossary in comments on videos, yesterday I got a ‘thank you’ so maybe another reader. I find it handy myself.
Thanks, Anne.
Why is short selling not banned?
That is a very fair question, and the short answer is that short selling of government bonds is not banned because it serves the interests of the financial system, not because it serves the public interest.
The orthodox defence is that short selling improves liquidity and so-called price discovery.
In practice, that means it allows traders to express negative views on bond prices quickly and at scale, often using leverage. For private assets, that may be a debatable but tolerable argument. For sovereign debt, it is much harder to justify.
Government bonds are not ordinary market instruments. They are policy tools issued by a currency-issuing state to support interest-rate management, savings, and financial stability. Allowing them to be shorted turns them into vehicles for speculation against public policy itself. That is why bond markets so often behave like political pressure mechanisms rather than neutral allocators of capital.
Short selling also amplifies instability. It enables rapid, self-reinforcing price falls driven by expectations rather than fundamentals, particularly when combined with derivatives. We saw this dynamic in the gilt crisis of 2022, where leveraged positions forced fire sales that had nothing to do with the UK’s real economic capacity.
So why isn’t it banned? Because banning it would reduce trading volumes, limit speculative profits, and weaken the power of financial markets to discipline governments. In other words, it would shift authority back towards democratic decision-making.
Perhaps the more relevant question, then, is not “why don’t we ban it?” but “why do we allow public policy instruments to be used for private financial speculation?”
Richard- have i got this right regards the government “swap”?
the swap is through the Bank of England. it transfers value from its CBRA to “Bonds Account”, and thence onwards to the bond market.
Its got to be said i find private sector double entry much easier to understand and follow
and thanks for you podcast with steve on double entry – illuminating
And a healthy 2026 to you and all fellow readers
Yes, I have it right.
Thye Bank of England is just a art of the government as the Whole of Government Accounts prove. The separation is a total fiction.
“bond vigilantes”
Fred gets back to dealing desk after “good (Friday) lunch” & a couple of lines, has difficulty focusing on the screen “ere’ why are the numbers all fuzzy”…………….
“coined by financial journalists” – who have for the most part little or no financial training and close to zero understanding about bonds or even how to make money from ’em.
The phrase is used to groom the population – keep it ignorant and passive.
Observation: need to distinguish between gov bonds (usually fairly liquid = plenty of buyers and sellers – but low yeidling) and corporate bonds (higher yeilding – but not so liquid).
Do “bond vigilantes” ever bother with corproate bonds?
Why cant the bond market be completely cut off from the real economy?
Because it is the role of the government to be the borrower of last resort.
I will do a glossary entry on that.