So-called bond vigilantes - investors who punish profligate governments by selling their bonds, driving yields higher - were a feature of markets in the 1990s, when concerns over U.S. federal spending pushed Treasury yields to 8%.
While the Federal Reserve’s hawkish interest rate projections have been a key catalyst driving yields higher and weighing on prices, market participants pin part of the selloff in longer-dated debt on investors wary of rising spending.
"People are waking up to the idea that interest expense alone is increasing at a rate that’s not sustainable," said Jake Remley at Boston-based asset manager Income Research and Management.“The bond vigilantes have been challenging Yellen’s policies by raising bond yields to levels that threaten to create a debt crisis,” he said in a Financial Times opinion piece on Wednesday. “In this scenario, higher yields crowd out the private sector and trigger a credit crunch and a recession.
Bond investors "are rather powerless pawns in this interest rate chess game," he told Reuters by email. "The powerful kings and queens control the board with inflation and enormous future supply of Treasuries, leading to a possible checkmate at higher yields and lower stock prices.”
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