In the 1970s and 1980s, bond investors stepped in when authorities failed to control inflation and budget deficits. During this period, economist Ed Yardeni coined the term “bond market vigilantes” to describe investors who exerted pressure on governments through the markets, effectively enforcing fiscal discipline.
Today, according to Steven Bell, Chief Economist EMEA at Columbia Threadneedle Investments, the current situation bears many similarities to that era. While inflation is lower, public debt is rising significantly. In the United States, the deficit has reached 6.3% of GDP, an unprecedented level during economic expansion. With public debt set to exceed 100% of GDP this year, markets are closely monitoring the new administration’s moves.
Impact on the United States and the United Kingdom
In the U.S., the Trump administration has proposed tax cuts and higher tariffs, but markets fear the consequences. Although the American economy remains strong, rising bond yields are putting pressure on stocks.
In the UK, the increase in Gilt yields has weakened investor confidence, making it harder for Chancellor Reeves to implement fiscal measures. According to Steven Bell, around 75% of British Gilt fluctuations depend on the U.S. bond market. However, the remaining 25% is influenced by domestic policies, and recent government decisions on minimum wages and public sector pay increases have worsened the outlook.
What to expect in the coming months
The outcome remains uncertain. In the U.S., inflation is expected to decline further in 2025, and if the administration takes steps to reduce the budget deficit, Treasury yields may also decrease.
For the UK, the situation is more challenging. Companies might raise prices and cut jobs due to rising wage costs, while homebuyers may rush to finalize purchases before an increase in stamp duty. The Bank of England is expected to cut interest rates next month, though some analysts believe they may remain unchanged.
Meanwhile, the Office for Budget Responsibility‘s March report may highlight higher debt levels, fueling concerns about further tax increases and tough fiscal decisions. However, not all news is negative: public sector wage hikes have eased labor disputes, and the construction sector, except for residential housing, appears promising.
According to Steven Bell, if U.S. bond yields start to decline, the UK could follow suit. In this case, the “bond market vigilantes” might retreat, allowing risk assets to recover.
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