Return of the Bond Vigilantes Sent Shockwaves Around the Globe

Deficits didn’t matter – until raging inflation brought the bond vigilantes back to life.  

By Wolf Richter. This is the transcript of my podcast on Sunday, Oct 16, THE WOLF STREET REPORT.

Over the past three weeks or so, we had some spectacular chaos in the United Kingdom’s bond market that then threatened to topple big pension funds that then threatened to spread the damage further into the financial system. In the process, the British pound got hammered to record lows against the US dollar.

This was triggered by the brand-new government’s announcement of the biggest tax cuts since the 1970s, tax cuts for the rich and for corporations, and some extra spending, all of which would have to be funded by selling even more new bonds into a bond market that is already getting eaten alive by 10% inflation combined with way-too-low interest rates, and by a government that is already over-indebted just as economic growth is stalling. And that’s when we saw them for the first time in many many years: the bond vigilantes.

The bond vigilantes can be brutal, and they can be fast-moving, and they can come out of nowhere, and suddenly they’re here, and chaos ensues, and bond prices plunge, and yields spike, and liquidity vanishes, to the point that it threatens the functioning of the bond market, and therefore the functioning of the economy, and it forces politicians and governments to change policies.

Bond vigilantes can intimidate anyone – because in an economy that runs to a large extent on debts, when the cost of these huge debts spike, and when liquidity in the bond market disappears, all heck breaks loose, and scary stuff can happen. So when the bond vigilantes come to town, it can get wild.

Bond vigilantes came out of the 1970s and 1980s in the US, when bond holders were clobbered half to death by waves of ever-worse inflation. And when inflation finally began to subside in 1983, bondholders remained leery and unwilling to believe, after the misery they’d been through, that inflation wouldn’t return. And they were leery of the ballooning government deficits that they would have to fund. And so US Treasury yields remained high and came down only slowly, and then suddenly surged again, to the greatest frustration of the Reagan, Bush, and Clinton administrations.

Deficits don’t matter – until the bond vigilantes ride into town.

But central bank money-printing and interest rate repression since the Financial Crisis had done away with the bond vigilantes. It’s like they were taken out the back and shot by central banks. Relatively low inflation rates at the time made that possible.

Now everything has changed. Inflation is raging, central banks are tightening and hiking their rates to combat inflation, but economic growth is stalling, and central banks have to keep tightening despite stalling growth because inflation is raging, and the bond market has been taking big losses as interest rates are spiking, and bond prices are falling.

So this is not the kind of environment to spook bond markets with reckless fiscal policies.

What happened in the UK was the first re-appearance from the dead of the bond vigilantes in maybe decades, and they fought their first battle, and they won, and after they won, they’re sticking around and are not going away. This sent shockwaves into the rest of the world, and bond yields have jumped all around.

Bond vigilantes is a figure of speech. They’re big institutional investors that buy government bonds sometimes with a lot of leverage and via complicated derivatives. They’re insurance companies, pension funds, bond funds, hedge funds, even individual investors.

When they get tired of being beaten up by raging inflation, reckless fiscal policies, and artificially low interest rates, they refuse to buy bonds, and some are selling bonds, and so buyers vanish, and new buyers have to be lured into the market with higher yields and lower prices, or else no one is buying, and this is pushing up interest rates further and pushing down bond prices further, and so these bond vigilantes are imposing high costs of borrowing as punishment.

So what happened in the UK was this: A few weeks ago, with inflation already at 10%, a new government tried to put its stamp on the economy. It came up with a stimulus plan of tax cuts and subsidies that would fire up inflation even more and at the same time would increase the need by the government to borrow large amounts.

The new government announced a package of big tax cuts essentially for the rich: it would scrap the top income tax rate, and it would cancel an increase in corporate taxes. These tax cuts would be accompanied by a surge in spending on energy subsidies for businesses and households.

When inflation is already spiraling out of control, cutting taxes and throwing subsidies out there, that combined would trigger a huge burst in borrowing, is exactly the wrong prescription to get inflation under control. And the UK bond market had conniptions.

Bondholders get eaten alive by inflation because inflation eats the purchasing power of those bonds, and the interest rate, the yield, of those bonds isn’t nearly enough to compensate the bond holders for the loss of purchasing power.

So already when the new government came to power on a platform of tax cuts and increased spending, the bond market started acting up. And then, when they made their announcement in late September, the bond market went haywire.

Back in mid-August, the 10-year yield of UK government bonds – gilts, as they’re called – was still around 2%. By September 26, six weeks later, they’d spiked to 4.5%, which is a huge jump in a very short time. It did that initially because the bond vigilantes stepped away from the market, didn’t buy, or even sold their holdings into the market.

And then the secondary effects set in. The spiking yields caused a group of large pension funds to get in trouble with their so-called “liability-driven investment” strategy, or LDI, which is a leveraged system of derivatives that were using long-dated government bonds as collateral. When yields of those long-dated government bonds spiked, as prices plunged, these pension funds got margin calls from the very investment banks that had sold them those LDI strategies.

And so the pension funds started dumping bonds, and other assets too, to meet those margin calls, and because they were dumping bonds when the bond vigilantes had already stepped away from the market, the UK government bond market essentially fell into panic.

To calm the waters, the Bank of England stepped in with a temporary bond buying program, but has bought much smaller amounts than it had indicated. It is caught between this crisis and inflation that is raging at 10%. So it kept its market interventions much smaller than announced, and they ended on Friday. Bank of England governors said that, at their upcoming November meeting, they would hike interest rates and re-kick off quantitative tightening that they’d delayed because of the crisis. Their number one issue is 10% inflation.

And to further calm the waters, finance minister Kwasi Kwarteng, the co-architect of the new policies and longtime ally Prime Minister Liz Truss, announced that he’d shelve the plan to cut the top tax rate.

But the turmoil and backlash persisted. On Friday, so that was October 14, Prime Minister Truss sacked Kwarteng. So he’s the fall-guy. His sacking prepared the way for her U-turn on the tax cuts.

And the new guy to replace Kwarteng is Jeremy Hunt, a former foreign secretary who is seen as calm and reassuring to the markets.

And Hunt came out and scrapped Truss’s tax-cutting plan just right there on BBC on Saturday, when he told the BBC that some taxes would not be cut as quickly as people want, and some taxes would have to go up. And he said he would move to limit spending. “So it’s going to be difficult,” he told the BBC. He said that Truss had made mistakes with her plan to cut taxes and increase borrowing to fund those tax cuts.

The U-turn happened because the all-important bond market went into a revolt against government policies that promoted even more debt and ever more inflation, at bondholders’ expense.

This was the first real battle that the bond vigilantes fought in many many years. And they won. And this sent shockwaves through the global markets – and it put other governments on notice.

The bond market is hugely important for overindebted countries and companies; it’s hugely important for the United States.

The Federal Reserved is tangled up in the worst bout of inflation in 40 years, and they’ve got to bring this inflation under control by hiking rates and reducing their balance sheet through quantitative tightening, despite economic growth that has essentially stalled. But interest rates on Treasury securities, though they’ve now jumped over 4% for most maturities, are still woefully low, with inflation at over 8% being twice that rate. And bondholders are getting eaten alive by this inflation.

The bond market is in a very sour mood in this environment of high inflation, low economic growth, sky-high government debt and corporate debt, and still very low interest rates that are far below the rate of inflation. These are insidious times for bondholders that have come to rely on the Fed put – via Quantitative Easing and rate cuts – to halt market drops.

And the Fed cannot step in and restart QE and cut interest rates because it would unleash a huge amount of inflation on top of the already raging inflation, and it would just blow up everything.

The Fed put is out the window for the stock market too. When inflation is raging, there cannot be a Fed put. The markets have to find their way through this on their own.

And what happened in the UK shows just how powerful the bond market can be when it is getting abused by raging inflation, artificially low interest rates, and reckless government policies.

The bond vigilantes might re-emerge in the US too finally, and rattle some nerves and threaten to impose some much-needed discipline on Congress whose reckless spending practices have gone haywire over the past many years of ultra-low interest rates. Deficits really don’t matter – until raging inflation brings out the bond vigilantes.

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  104 comments for “Return of the Bond Vigilantes Sent Shockwaves Around the Globe

  1. Aaron Fairchild says:

    Good stuff as always wolf!

    Curious if you have any insight into a narrative I stumbled upon that described government backed lending as a back door QE?

    Seems they were focusing mostly on Europe and Japan and to a lesser degree the states

    Seems kinda BS to me but as you noted in the article government spending seems a bit out of hand

    • Harry Houndstooth says:

      Really good stuff.

      Wolf Richter is a lighthouse of truth, reason, and clairvoyance over a choppy sea of confusion, misconceptions, and invalidity.

      Pure wisdom dispensed daily.

    • Scrawny Bear says:

      I recently read ‘The Lords of Easy Money” which briefly discussed how QE was sent out to Primary banks resulting in massive asset inflation as the funds ended up with hedge funds and private equity groups. Now that the Fed is presently using QT to reduce its balance sheet, can someone explain (in Peter Rabbit language ) the mechanics of how this results in margin calls ? Is there a reverse leverage or multiplier effect ? How does this relate to press warnings of “global margin calls” ? I’m 40 years since taking Money & Banking and I doubt that by passing the commercial banking system to fast track money to Wall Street wasn’t contemplated at the time.

  2. Jon says:

    In usa fed can buy all the bonds if needed like what Japan has been doing for decades.

    • Wolf Richter says:

      No it can’t, with inflation at 8%. People need to get a grip on this. QE is off the table with 8% inflation or even 6% inflation or even 4% inflation. Just forget it. This is the most important principle people need to get a grip on now.

      Even Japan is unwinding its balance sheet, with inflation only at 3%. Back when Japan did QE, inflation was around 0%. That era is over.

      • SocalJimObjects says:

        Inflation at 3% in Japan can not be right. The Yen has lost 22%, and Japan is an energy importer. Someone is eating that inflation, the question is who?

        • Thunder says:

          also raw commodities other than Energy is not spoken about but have not only risen but doubled since Feb 21 and this is becoming a huge problem for the value add economy and domestic pass through.

        • Harrold says:

          Japan imports little from the US.

        • Wolf Richter says:

          Yes, the government was eating part of it. It’s provided energy subsidies to fuel wholesalers and others to keep retail prices down; it also runs the healthcare system, and so there was predictably negative inflation in healthcare prices that consumers pay, etc. Still energy inflation was quite high.

          Do read the article I linked. I provides some detail.

        • Anthony A. says:

          Harrold,most of the goods imported to Japan come from China (24% of total) and the U.S. is second on the list with 10+%. It’s not “very little”.

        • Miller says:

          We had a financial seminar last year that went into a lot of depth on why Japan and the US are apples and oranges here and why we shouldn’t just presume we can do perma-QE and spiraling budget deficits, don’t recall everything they said but here was gist of it. Japan is bit of a special case–or at least it was, until recently when they’re now also fighting inflation–because at least up to recently, it’s been running massive trade surpluses and it’s national debt is overwhelmingly from domestic holders with a lot of social cohesion, while household debt in Japan (using median debt to income–it can get skewed by a few billionaire outliers), like most of Japan’s major trade partners in Asia and Europe, is relatively low or at least has been historically. Iow the government takes on high public debt while private debt and leverage is low, and personal savings are quite high (tho a lot of this is just cultural esp in eastern Asia, and has been changing somewhat recently in Japan), providing a bit of a cushion for policies to help mitigate inflation. (And of course this goes only so far even there, Japan now is also seeing higher inflation and having to make fiscal and monetary reforms) The USA has massive and recent record trade deficits, and there’s not only high public debt burden but relatively high leverage and household debt, just culturally there seems to be more tolerance for high debt and less savings.

          Then like Wolf said, the Japanese govt. handles universal healthcare so this helps to keep a lid on healthcare costs, which are going down now and also quelling inflation. This is a massive contrast to the United States, where our clunky, costly and inefficient healthcare system–a mix of the worst parts of private (aka. rentier and crony capitalism) and public systems that just grows massively in costs each year, despite worse results including the worst life expectancy of developed countries, now below even China and Cuba. Like a lot of other commenters here have said, the bloat of US healthcare sector has been a huge contributor to our inflation. And then Japan has also been diversifying its fuel sources mix, with renewables in the right places ex. with tidal power that helps to keep some of those costs lower. Just all together, the US is esp vulnerable if the national debt spirals out of control and inflation climbs even higher. The main speaker pointed out this is where the disaster of the Iraq war really hurts us, made worse by other dumb boondoggles like our operations in Syria, Libya, Iran and Yemen–about $8 trillion in costs (and counting, ex. for veteran’s costs) that we took on even while some administrations were cutting taxes for the rich, all leading to defeats and failures with all those trillions of dollars wasted fruitlessly in the Mideastern desert. Part of what’s going on now is the chickens coming home to roost for that.

      • AD says:

        Temporarily raise taxes to pay down debt

        Encourage more domestic oil growth while still continuing about 0.5% to 0.75% increase in renewable energy each year

        Cut back on spending somewhat or hold it constant; reduce the student loan bailout

        • historicus says:

          “Temporarily raise taxes to pay down debt”.

          Can you point to an historical example of a “temporary tax?
          And implementing any tax to halt inflation is ridiculous.
          First, this is the basis of MMT….tax to halt inflation.
          Businesses and people, struggling with ever higher costs, are to be taxed, harmed, further?
          The money will be drawn from the private sector and deposited into the government…..who will spend it anyway.
          Private sector smaller….government bigger. This is the real objective of MMT.
          Big government spending, the Trillion dollar spending bills so common now, but were unheard of prior to 2008, are the problem.

        • phleep says:

          > “Temporarily raise taxes to pay down debt”.

          historicus’s reply shows the dilemma. It is politically impossible to rebalance with tax hikes (which succeeded under George H. W. Bush in a different, rare time), in a country founded on a fight against paying taxes.

          So, both parties resort to printing, which also inflates away debt. We are in a terrible bind. We are so far down that debt road, it is hard to imagine taxing this economy enough to actually pay down the debt pile. This system is so decayed.

          We face, to paraphrase Nouriel Roubini in his book release this week, a stagflationary debt crisis, as a result — an overlay of the 1970s with 2008. The knot is so tightened for so long, what will break it? It will come out of living standards somewhere. Who will get the dinner check?

        • historicus says:


          IMO what we are witnessing currently is that the “real world” is departing from the “imaginary world” created, temporarily (12 yrs or so), by the central bankers.
          That is why Price stability is broken
          That is why the stock market is broken
          The debt market is broken
          The real estate market is broken

          and the central bankers are yelling at the “real world”,”HEY come back here.” But the bond vigilantes and reality will not come again under the central banker spell…..for quite a while.
          Now the central bankers must adjust to reality, rather than the other way around as it was for so long.

        • Old school says:

          I think we are in a new place. Politicians and us peons are not used to it. Things that worked in the past will not work when you can not tax enough or inflate enough to keep promises that have been made.

          Some or all of us will will be disappointed with a lower real income to continue for next few years.

        • AD says:

          Perhaps a new beginning is happening within the next 12 months which is return to 1990s as far as interest rate environment.

          Then the Fed Funds rate will stabilize around 4.5% and the 30 year mortgage rate will steady around 6% to 6.5%.

          That means peak housing prices would need to drop about 30% since there is a 10% drop for every 1% increase in the 30 year mortgage rate.

        • If inflation remains elevated for a long enough period the debt will be resolved. A dollar in your pocket is a liability, spend it wisely.

        • Wolf Richter says:

          1. “A dollar in your pocket is a liability…” Nope, on the contrary. It’s an asset for you. It’s a liability for the Fed. Like a Treasury security, which is an asset for you and a liability for the government.

          2.”… spend it wisely.” Yes, totally agree.

      • Jon says:

        If fed has to choose taming the inflation or saving the bond market what would it choose ?

        Also fed has been doing well for last 12 years. Inflation showed up only when given direct stimulus to populace.

        Before covid inflation was very low.

        • Wolf Richter says:

          “saving the bond market”??? What do you mean? The Fed wants higher yields, and it’s getting them. And so bond prices fall.

          The Fed now has emergency tools to deal with the repo market if it blows out again (like it did in late 2019), namely the Standing Repo Facilities that it didn’t have in 2019, but that it implemented in the summer of 2021 in preparation for QT so that it could handle market blow-outs without QE this time. I wrote about it extensively at the time.

          Inflation destroys the bond market. The Fed has to bring inflation down to keep the bond market functioning. And it understands this, everyone should understand this.

          I see your kind of comment a lot these days. I have no idea why these concepts are so hard to grasp. Maybe 14 years of QE and low inflation did a job on investors’ brains? Or maybe it’s just the usual market pump-and-hype with a twice of lime.

      • gametv says:

        Wolf – I think the one point you miss in your article is that the face value of bonds falls when interest rates go up, so the interest payments can easily be more than offset by the falling face value of the bond. Also, most investors have used bond funds rather than purchase bonds and hold them to maturity, so those investors see actual declines in the bond funds as interest rates rise.

        I think that in the near future, this will also be the same issue in the real estate markets. For anyone who rents out properties, the amount they earn off the cash flow will be overwhelmed by the losses they take on the actual value of the property.

        I know that if people dont sell a bond or property, they can essentially never “claim” that loss in principle and ride it out. But when loans are far in excess of the value of a home, it wont matter. I wonder if many REITs will collapse as the value of properties falls below the debt?

        To all those people who only pay attention to cash flow, principle valuations matter.

        • Wolf Richter says:


          “I think the one point you miss in your article is that the face value of bonds falls when interest rates go up, so the interest payments can easily be more than offset by the falling face value of the bond.”

          There’s a little bit of confusion here in terms of the lingo. No, the “face value” doesn’t fall. The face value is fixed. The face value of a $1,000 Treasury note with a maturity of 10 years is $1,000 every single day, and that’s what you will get when the bond matures.

          What changes is the “market value,” the price in the secondary market where bonds are sold and bought.

          However, the closer to the maturity date you get, the closer the market value is to face value because at maturity date, the holder receives face value. In other words, bonds that are close to maturity date don’t change much in market value, and market value is close to face value.

          in terms of the bond funds, I agree with you. I hate bond funds and have said that many times – for a variety of reasons, one of which you spelled out.

        • gametv says:

          Thanks for correcting my terminology.

        • Wisdom Seeker says:

          Re “most investors have used bond funds rather than purchase bonds and hold them to maturity”

          I want to see evidence for that claim.

          Insurance companies, sovereign central bank reserve funds, the Social Security trust fund and pensions don’t need to own funds, they generally own bonds outright. And I believe they account for the majority of bond ownership.

          For 401K investors you’d be right. We get screwed as usual.

        • Swamp Creature says:

          The only bond funds I buy are ones with short maturities. Even the one I have has taken a slight beating with the interest rate spike that occurred since the summer. If I see any mass withdrawals from the fund or high turnover (red flags) I will be getting out of dodge before the end of the year.

      • Bond BuyBack says:

        Fed is now discussing a bond buy back program. What is the difference between a buy back program versus QE?

        • Wolf Richter says:

          Bond BuyBack,

          BS. The Fed is NOT discussing a bond-buyback program. Get your head examined.

          The Treasury Dept had a meeting with primary dealers to explore buying back bonds. They had these discussions at least twice before that I know of, in 2015 and last summer. And nothing came of it.

          They would offer to buy back less-traded bonds that they’d issued years ago and replace them with new bonds that are more easily traded. But this is very complicated because any buyback at market price now would be below face value. If they buy them back at face value, it would instantly mean that yields would have to plunge to meet those levels.

          They ended up not doing anything the last two times they discussed this, and there is a good chance that this will go nowhere.

          In the US only the Fed can create money to buy assets with = QE.

          The government has to get cash from tax revenues or borrowing, and so the government can never do QE. If it wants to buy back bonds, it has to get this cash from borrowing = issuing new bonds.

          Who are the idiots out there that spread this BS about the meeting?

        • BOND BUYBACK IDIOTS says:

          I was reading reuters news. Sorry, I should had noted the Treasury Department not the FED.

    • Augustus Frost says:

      So, can every other central bank. QE isn’t only available to Japan or the US.

      If your point is valid, why doesn’t every central bank do it, forever?

      The answer?

      People aren’t robots. QE only worked because market participants allowed it.

    • Miller says:

      Like Wolf and a lot of people here saying, all those old presumptions don’t apply anymore in a high-inflation environment. Those sorts of tools and crutches just don’t work. It’s really the first time in 40 years that we’ve faced something like this.

  3. Mel says:

    If this was a western and the bond vigilantes the heretofore much heralded calvary, we’d be a pile of bleached bones in the arroyo, our chance of salvation long passed

    • VintageVNvet says:

      Just HAVE to say Mel,,, WONDERFULLLL analogy, or whatever it’s called these days when, according to what I read, ”’vigilantes”’ are bad.
      Was put in the jail last couple times i tried to do the vigilante thing,,, and now absolutely not going to try to ”rescue” anyone anywhere due to age related physical ”disabilities.”
      Seriously hoping ”BOND vigilantes” actually DO what needs to be done to at least TRY to bring markets,,, apparently ALL markets, back to some semblance of reality…
      Agree with AF that that is not likely due to GUVMINT interference,,, but WE the PEEDONs can at least HOPE.

    • Xavier Caveat says:

      Bond, special agent .006932

  4. Harrold says:

    Bond yields don’t make sense and they haven’t for years. How were interest rates near zero even with 2% inflation? It’s a guaranteed loss. The only thing that explains it is investors would rather lose 2% than invest in overpriced stocks that can go down much more.

    Now they seem willing to lend the gov’t money with a guaranteed 4% loss. They either don’t believe inflation is real, or they think it will be over soon. Otherwise bonds yields would get bid higher than inflation. Vigilante justice seems pretty pitiful to me.

    • historicus says:

      there was once a Federal Reserve, long ago and in a land far away, that made certain holders of dollars were not punished merely by holding the currency. Fed Funds were kept even, at least, with inflation.
      (Look for charts of Fed Funds vs CPI)
      Enter the “new” Fed…..the Bernankes and the Yellens…..who knew…just knew…they were smarter than free markets and fancied themselves magicians with new economic theories. Press rates below inflation to “force” investors into markets and assets. And here we are….. locked in a wealth destruction machine of down assets and locked in losses via rates below inflation.
      And as Yellen has quipped during one of her speaking engagements, attended by seat fillers forced to attend, “We werent wrong. It was the theories we chose to follow that were flawed.” An interesting take on responsibility.

    • phleep says:

      “Now they seem willing to lend the gov’t money with a guaranteed 4% loss.”

      Nothing new here. Governments have resorted to some form or other of coerced loans from capital holders, to hold things together, for centuries, maybe millennia. Italian city-states and the UK both twisted permanent loans from their rich constituents. The EU did it blatantly with NIRP, we less blatantly with ZIRP. Cash is generally a wasting asset, until that key moment when liquidity becomes a life-and-death thing. Inflation and low interest is the tax or insurance premium I pay to have cash in that moment.

      • Ed7 says:

        Indeed. A government willing to coerce usually can coerce low rates because of course in the end they can expropriate, should they care to do so.

        The rule of law gets in the way of this.

        Funding coercion should be much easier in an authoritarian state, as with so many other things.

        (I think it’s not necessary to say how that “easier” is not “better” in this case. No one wants to move to Russia, where a peep of dissent can cause complete dispossession by the state.)

    • cb says:

      There is trillions of dollars looking for shelter. 3 to 4%, short term, is better than zero. And better than the alternative of other over priced assets.

      Wolf has explained all this several times.

    • gametv says:

      What explained it was that there has been too much cash seeking a return.

      The amount of QT that has occurred to date is minimal. Can you imagine what happens if the Fed and other central banks sold off the assets all the way down to the amount they had at the beginning of COVID? Can you imagine what happens if the government stopped running a massive deficit each year?

      Hopefully, the bond vigilantes will land in the US and force our corrupt politicians to stop adding to the national debt.

    • ru82 says:

      Yes. ZIRP and NIRP did not make sense. I do not know how they thought this would work out.

      When you loan out money, their is always a risk of non-payment. Interest rates should reflect that risk.

      The last 10 year have sort of been risk free… theory.

    • Jdog says:

      The problem begins with imbalanced economic fundamentals, in this case, too much money in the system, too much borrowing both public and private. When there is too much money in the system, supply is greater than demand and interest rates drop as a result.
      Inflation, paradoxically causes deflation in the bond markets, as returns become negative and result in money destruction, lowering supply. Lowering supply increases demand and interest rates. The longer inflation lasts, the more money is removed from the system and deflation begins to affect all assets. As asset values decrease, even more money is destroyed and the cycle continues until fundamental economic principals are restored.

  5. eric says:

    Wonderful description of what has happened lately, connecting dots with clarity and humor.

    This the election Millennials and GenXers start to take control. Brave new world?

    • phleep says:

      I warily eye those disappointed youths. But they cannot reengineer global finance, even if elected. Broke is still broke, regardless of slogans. Bond vigilantes will have their due. Note Italy right now, Greece last decade. Their hot shot revolutions melt like summer snow. Note the UK right now: its chain yanked in the bond markets.

      But yeah, those old folks are rigging the red states’ voting (hence Senate power) with renewed, historically high intensity, backed by a complicit Supreme Court. They keep their eyes on the prize, and move methodically toward it. That’s how, in their eyes, these elites keep the mob from looting them. I can’t completely blame them. Sadly, with such dynamics, the reasonable middle ground will not materialize.

  6. SpencerG says:

    “On Friday, so that was October 14, Prime Minister Truss sacked Kwarteng. So he’s the fall-guy.”

    I disagree with this statement. In the U.S. system an underling can be the “fall guy”… but in the British system the Prime Minister usually gets the blame for their underlings. No one ever gets called the “Teflon PM”… Liz Truss is toast.

    • Wolf Richter says:

      She tried and is still trying very hard not to be toast. And sacking Kwarteng was one step. She apologized, she U-turned, she did everything she could in order to avoid being toast.

    • Auld Kodjer says:

      Letter to the Editor of the FT by someone with a mischievous sense of wit:

      “She will be gone soon. Her legacy is actually quite impressive. She’s buried the Queen, buried the Pound, and buried the Tory Party”.

      • AB says:

        My personal favourite tabloid headline about Kwarteng at the height of the crisis was, “Honey I Shrunk the Quids”.

        Truss’ U-turns essentially means she stole the election from Rishi Sunak. His supporters haven’t gone away. The Conservative Party cannot go through a new formal leadership process without calling for a general election, in which they would be obliterated. The only viable mechanism, other than resignation, is a Cabinet revolt, but it is filled with Truss supporters and Jeremy Hunt who has no incentive to revolt – he’s the de facto PM.

        The UK economic narrative has been too concentrated on gas prices, rather than overall inflation. There isn’t a serious debate about combating inflation and the public has not been prepared for higher interest rates, high inflation and reduced public spending.

        The narrative is based on how generous the government subsidy needs to be to alleviate the pain. The middle class (the electorate) will tolerate inflation and subsidies for themselves or the poor if funded from the national credit card at low interest rates, but not falling house prices. That’s unfortunate because that’s what’s going to happen.

        I think it’s likely Truss will be kept in place during the economic reality phase now underway. Hunt and Bailey have a green light to go big in their respective domains and Truss will have to take the punches. I’m not convinced she can absorb them. She looks defeated.

        • Augustus Frost says:

          The population is never ready for noticeably lower living standards.

          That’s the future of the UK and US both, for most people.

      • Harrold says:

        FT sure did a quick 180 degree turn didn’t they?

        4 weeks ago they were applauding Truss and her plans to cut taxes and raise spending ( trickle down lol ).

    • Bobber says:

      Her stupidity was laid bare for all to see. Then she tried to blame another, throwing moral vacancy on top of it. There’s no recovery from that in a just and logical world.

    • robert says:

      It’s more like it was a set-up to get rid of Truss – somehow the most harebrained minibudget imaginable was announced and immediately crashed markets and the pound, resulting in the quickest 180 turn in living memory, or maybe any memory. Truss is now on the brink after only just being appointed PM, now look for Ministers resigning.
      Top of, or well up the list to replace her according to oddsmakers:

  7. Tommy Stack says:

    I am UK citizen born London, as ever I have to read Wolf for a clear and unbiased report on what is going on. This time the political crisis caused by the hasty Truss/ Kwarteng “mini-budget”. Thank you again Wolf for providing such clear information and facts.

  8. Ian says:

    And thank god for them at last! Truss handled the whole thing ham fisted but actually her only fault was to think that she can continue the same unfunded dance that everyone before her has done for a decade and a half. She was just too dopey to realise the music had already stopped. Now she is being vilified for the same behaviour as her predecessors who they cheered on.

  9. LordSunbeamTheThird says:

    Yes! But who would voluntarily own UK gilts anyway? Same for US treasuries. When interest rates are being manipulated down, then of course the value goes up but that game is over. When you can’t push interest rates down anymore its over. As the Japanese government official put it when broad inflation is going down its quantative easing, when its going up its printing money no excuse.

    I think the UK government has legally required pension funds, insurance companies and the banks to own gilts, and of course the BoE holds, so QE and regulation have been holding the market up for DECADES as have all the other charlatans, and now has kindly demonstrated what happens when the wheels come off.

    UK inflation ticked up to 10.1 so not going down. UK Banks slowly getting interest rates on deposit up to 4%. UK story is not over and I read (present continuous) recently a growing opinion that inflation will not end until the base rate goes above the rate of inflation, which would be impossible for the domestic economy to handle as far as mortgages are concerned let alone government or business costs.

    Gilts are called gilts because they are gilded on the edges.

    • Harrold says:

      Insurance companies by lots of gilts.

    • Wolf Richter says:


      “But who would voluntarily own UK gilts anyway? Same for US treasuries.”

      This is a shitty investment environment. Nearly all asset classes — stocks, bond prices, cryptos, gold, real estate – went down, so you have 8% loss in purchasing power in the US (10% in the UK) due to inflation on top of the drop in asset prices. So I’m looking for the “least worst” investment right now.

      Can’t speak for gilts, but I “voluntarily” own US Treasuries. They pay over 4% in interest, and I hold them till they mature in 6 months, 1 year, or 2 years, and then I get 100% of my money back. Can’t say the same thing about stocks or cryptos or real estate or gold. When the 10-year and the 30-year yields rise to a level I find adequate, I will “voluntarily” own some of them. I also “voluntarily” own a bunch of Treasury i bonds that we bought over the years. Turned out to be a good deal this year, actually, as the whole pile paid 9% interest for half of the year and a little less for the other half.

  10. Great piece of information, curious if you may also have a look at the insight of a describes government-backed loans as backdoor QE?

    Because I am not happy with this statement. Because there is some major difference between US system and UK system,

    • Wolf Richter says:

      QE is when a central bank creates money to buy assets with. Only a central bank can do QE. This is the same in the UK as in the US. No difference.

      Government-backed loans, or loan guarantees of any type — which most governments provide for various things, including US and UK — are not QE by definition. But they allow a risky borrower, such as a nuclear power plant, to borrow at a much lower rate.

  11. freewary says:

    I see comments about bond markets like this on many websites I frequent:

    “liquidity vanishes”, “liquidity in the bond market”

    These are ridiculous ideas. There is plenty of liquidity available at lower prices. I and many others would love to buy these bonds at rational prices.

    I am a bond vigilante. I slashed my allocation to bonds around 2009, only had a few junk bonds left by 2020, sold all.

    I would love to own bonds again- my fave investment honestly. I’ll buy again when I see the rate of return much higher than the growth of M2 (and my m3 estimates), and some evidence that the bond would have positive real yield for the duration.

    Unfortunately, the US Government and Federal Reserve have recently shown an ability to increase M2 by 40% in a year (happened under supposedly conservative Trump), and I don’t see they suffered any political consequences or consequences of any kind for their theft. So I’m looking for a rate of return double that on bonds- that would be 80% on AAA. Rates at this level are common in corrupt societies like ours with inflationary currency systems.

    Until rates greatly exceed MONETARY inflation, there are plenty of other things to invest in.

    • Wolf Richter says:

      “I would love to own bonds again- my fave investment honestly. I’ll buy again when I see…”

      Not sure if the bond market will accommodate your wishes. But Treasury bills pay over 4% right now, the 2-year pays 4.5%. You can earn a little interest while waiting for long-term bond yields meander higher. And then when they’re high enough for you, you can swoop in and buy.

      • Seen it all before, Bob says:

        3 month Treasuries at 4%. 6 month Treasuries at 4.4%, One year Treasuries at 4.5% yesterday. A good time to ladder any cash and be ready. Sadly, still losing to inflation but doing better than the stock market or a Savings account.

        Of course, at 9.6%, Ibonds should be maxed first and held. If you buy now, 9.6%. If you wait until November, the rate will likely be “only” 6.4%. These are effectively 1 year bonds before you can sell and you lose the last 3 months of interest if you sell before 5 years.

        I am taking Wolf’s strategy with short term bonds waiting for long term bonds to achieve 15+% like they did in their former 1981 glory.

        Good Luck!

    • Sams says:

      Do notice that interest themself generate money. High interest rates speed up the process.

      The amount of money carrying an interest increase with time contributing to monetary inflation.

      If all money in existence did carry an interest monetary inflation can not be less than the interest rate. 😉

    • cb says:

      feewary said: “there are plenty of other things to invest in.”

      like what? please name a few things ……………

      • cb says:


      • freewary says:

        small scale investments:
        – high quality online degrees: bachelors $7k, masters $10k

        large scale investments:
        – certain commodities
        – extremely discounted value stocks anywhere on earth, 10-100 available any particular day

        • cb says:

          @ freewary

          Please name one high quality masters degree, one commodity and two stocks. for the particular day you post

        • freewary says:

          cb you have got to learn to do your own research.

          If I as a part time investor can identify 10-100 exciting stock bargains on a given day, there are certainly lots of great opportunities that you would enjoy. Highly recommend getting some Benjamin Graham books, or Nick Kraakman posted some lighter material on value investing that I like.

          As for degrees, there is a huge online industry for online degrees. Why not look up something you are interested in learning for fun, or if you need a better job, ask a hiring manager which institutions they respect- almost all universities now offer online or on campus degrees. The prices I listed are the lowest prices I have seen. I found a masters program for me that I like- it’s going to be only $10k spread out over 3-4 years as I work through it slowly.

        • cb says:

          @ freewary – who said:

          “cb you have got to learn to do your own research.”

          “If I as a part time investor can identify 10-100 exciting stock bargains on a given day, there are certainly lots of great opportunities that you would enjoy.”

          do my own research ………..
          what do you think I’m doing?

          What kind of returns are you making or projecting on these exciting stock bargains?

          Share some, and if your picks prove up, I will be in line for your fund.

        • freewary says:

          I would never share my stock picks on the internet. I avoid anyone who does, for many good reasons. The whole point of value investing is to have your own objectively calculated range and grounded conviction of what a security is worth, why bother asking others?

          It’s surprisingly difficult to calculate alpha scores and total return performance vs index on 15 years of investing in multiple brokerage accounts I’m actually working on this as a hobby project.

          Unfortunately, due to the pro-oligopoly security regulations, even if my project confirms my belief that I’m beating the index, the partnership I want to start would only be open to family and very close friends.

          If my performance measurement project shows I’m not beating the index, then I’ll retreat in shame, shut up and get a new hobby. Many on this forum, especially Wolf, may hope this is the case!

    • rojogrande says:

      “I’m looking for a rate of return double that on bonds- that would be 80% on AAA. Rates at this level are common in corrupt societies like ours with inflationary currency systems.”

      Are you joking? Is AAA a common rating on bonds paying 80% in corrupt societies like ours with inflationary currency systems? If we get to 80%, the bonds paying that rate won’t be AAA. Are Pay Day loans one of the other things you invest in?

      • freewary says:

        I’m saying as corrupt as things are and as fast as USD currency is created, interest rate of 80% is very reasonable for low risk borrowers.

        Why people are content to lend USD at 4-10% as others who replied is beyond me.

    • Augustus Frost says:

      What most people call “liquidity” is actually mostly debt. Relatively, there is very little actual liquidity in the financial system.

      The only actual “money” is central bank reserves and currency notes.

      It’s risk aversion which happened in the UK and overleveraged individuals, entities, and economies are badly exposed to it.

      • freewary says:

        Augustus Frost, thanks for this excellent insight about liquidity!!!

        I do disagree with you about your definition of money though.

  12. phleep says:

    I blame the masses. Both people-pleasing parties in the USA have fought for years to overheat the economy, and finally succeeded. The masses took the candy, drank at the punchbowl, gorged on vacuous consumerism. Now comes the tummy ache and hangover: overweight people and overstuffed landfills and creaking balances sheets and still wanting more. Democracy has its un-pretty moments, and this is one.

    • Poor like you says:

      You know we’re in trouble when 70% of America is overweight or obese, and we have microscopic shards of plastic in our blood.

    • HowNow says:

      Yes. Gluttony – one of the Cardinal sins. Here are all seven:
      Vainglory/Pride, Greed, Lust, Envy, Gluttony, Wrath, and Sloth.

      Sound like anyone you may know?

  13. Brant Lee says:

    We now live in an age where it’s unprofitable to even save because the money is no good, inflating away. Maybe people will get an idea of what it means to have a currency backed by something solid and valuable before long.

    The last 50 years have been a paper-printing party for the rich, politicians, and bankers. There they go, riding off into the sunset, job done.

  14. Bobber says:

    What’s amazing is that rates have gone way up and it hasn’t caused any obvious problems. Unemployment remains low. Inflation is still high. Layoffs announcements are few and far in between. Retail spending is strong.

    It’s been six months of higher rates. You’d think the high rates would have put a few entities into a higher level of distress by now.

    If you told me a year ago that long bonds could lose 45% absent a deep recession, I wouldn’t have believed you.

    Maybe the economic onslaught is coming, but maybe not. The economy appears stronger than anyone thought six months ago. I’m playing both sides of this with my investments.

    • Portia says:

      Mr. Doom at Chase is predicting a big blowup, and righteously proclaims they are well capitalized. He didn’t mention which non-bank corporations are going to blow up from derivative exposure. Any guesses?

    • Augustus Frost says:

      Be patient, it’s coming.

      If the interest rate cycle from 1981 bottomed in 2020, rates are destined to “blow out” later.

      You’ll have all the mayhem you expect then, both in the economy and financial markets.

  15. Jdog says:

    There are no bond vigilantes. There is only the bond market. During boom times, there is massive amounts of cash, generated by massive profits, much of which flows to the bond market and lowers interest rates as a result. It is a simple result of supply and demand.
    During bust times, profits decline, and defaults increase, destroying money and making money less available, which results in more demand and less supply, increasing interest rates.
    The religious cult belief in the Fed, and that it can control the bond market is proven to be false during economic recessions, as is happening at present.
    While it would be possible for the Fed to print money and buy bonds, it would be counterproductive. The printed money would drive inflation even higher exasperating the financial condition of consumers and lowering their ability to spend, creating more profit loss and more defaults on loans.

    • Wolf Richter says:

      Did you even read the article? Sounds like a kneejerk reaction to the headline without having a clue what the article even discusses. Commenting on the article without having read the article is in violation of commenting guideline #1, and I should delete your comment.

      • gametv says:

        I am curious whether the rise in interest rates, and falling bond prices is primarily due to a lack of demand by the typical buyers, or if it is driven by strategies that attempt to make money by shorting bonds (inverse ETFs and other derivatives).

        I tend to look for the parallels to the housing market, which is also an asset whose value is inverse to interest rates. In real estate it seems like a lack of demand will be the catalyst for market re-pricing in the initial stages, rather than a glut of supply.

  16. Inflation says:

    The US 10 year is at 4.1126% as I type. Why so increased?

    • Lone Coyote says:

      I don’t know, but there’s a CNBC headline that “bond yields could be peaking soon”. Obviously the company that employs Cramer would never print hopium and this can only be responsible, factual reporting :)

      • sunny129 says:

        Bond yields peaking soon
        Peak inflation in sight
        Fed’s pause or pivot any day.
        Fed will break ‘some thing’ on the way up and will make sudden U turn, like in UK
        So keep buying on dips, right?
        Financial media & Wall St.

    • Harvey Mushman says:

      The 1 year jumped 10 basis points to 4.60 %
      We’re trucking now!

    • Wolf Richter says:


      “The US 10 year is at 4.1126% as I type. Why so increased?”

      It’s still WAY TOO LOW. Inflation is over 8%. The 10-year yield should be above the rate of inflation.

  17. josap says:

    Take a look at corporate profits for the last two quarters, that’s where you will find a good deal of the “inflation”.

  18. Arthur Silva says:

    Hi Wolf, greetings from Brazil!

    Do you think that Fed interest rates can curb inflation, as the BLS data has shown a decrease in 3% in real wages between September 2021 and September 2022?

    As joke, Brazil has lived with huge inflation for about 50 years, from 1930 to 1980. Funny enough, when Brady’s Plan came for Latin American, we managed to control our inflation, but at expense of our industrialization effort, featuring one of the most accute cases of deindustrialization in the Third World. After 30 years of inflation control, we are now locked in a political instability crisis that has lasted 6 years… Sometimes, inflation isn’t the worse thing that can happen.

  19. Swamp Creature says:

    All the layoffs are being delayed until after the midterm elections. Look for all the big Tech companies, which are solidly in the pockets of this corrupt administration hold back announcing any major layoffs until after Nov 8th. You can take that prediction and put it in the bank!

  20. sunny129 says:

    I have a different approach to bond investing (in my IRA) beside the usual slowly nibbling on 3 months thru 10y ETFs along with long term bonds with BND. Most of these are in negative territory

    Another unorthodox method (NOT for every body) is I have bought ETFs shorting 20y bond like TMV and TTT and shorting 7-19 y TYO (bought today) Not recommended for novice or those uncomfortable with inverse leveraged ETfs.

    As of now TMV is +7% and TTT is +15% If yields go up it may go negative but I will add a little more. Only a very small portion invested.

    If you invest like every one else, you get the same result – John Templeton

    • Cookdoggie says:

      “If you invest like every one else, you get the same result – John Templeton”

      Like that’s a bad thing? Get off the hamster wheel folks.

  21. cb says:

    @ Wolf and others –

    I don’t recognize one stock with better prospects than the risk free 4% plus return on a 6 month treasury. For those who do, please share your idea’s and your reasoning.

  22. Kye Goodwin says:

    historicus, you wrote, “The money will be drawn from the private sector and deposited into the government…..who will spend it anyway.”

    Yes, that is what happens all the time, the normal arrangement. The important thing, thinking about inflation, is that the money is first taxed away from the private sector before it is spent by the government. You mention MMT, which I credit with educating me on this basic point: Taxation isn’t a revenue-generating action. It’s an anti-inflation action. If the money is spent without taxation then it is effectively spent twice, demanding twice the real goods and services.

    A national government’s problem can never be finding enough of its own currency. The problem is getting things done without degrading the currency.

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