Why Trump, Biden may need to fear bond vigilantes

Whether it's President Biden, former President Trump, or someone else, the person occupying the White House in 2025 may have to worry about bond vigilantes. Bond vigilantes are traders that will use, or threaten to use, the bond market to protest the government's spending or its inaction on the deficit. They can sell their bonds, forcing the interest rate to rise and making it more expensive for the bond issuer to borrow.

With the US deficit on the rise, whoever wins in November may have to worry about investors attempting to force the government to do something about it.

Wells Fargo Investment Institute Global Fixed Income Strategist Luis Alvarado explains that given "the amount of outstanding debt, the amount of deficit that is projected... it can pretty much tell you that there is going to be some sort of reaction from bonds."

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This post was written by Stephanie Mikulich.

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Since you bring up the deficit, I want to talk about the debate last night, both candidates were asked about the deficit and there wasn't a lot of clarity about the extent to which they are going to address it in terms of actionable policies moving forward.

I'm curious then, from your perspective, and you look at, you know, the fixed income space in particular, do you think there's a likelihood here of bond vigilantes coming back into the space to force the deficit issue after November?

I would say there is, I would say at this point in time, the amount of outstanding debt, the amount of deficit that is projected and we got recent projections from CBO.

Um It can pretty much tell you that there's gonna be some sort of reaction from bonds, like I mentioned, looking at that simple equation.

In other words, the term premium is pretty much negative or at zero and it's really difficult to kind of envision that moving forward, especially with the amount of spending.

Obviously, we, we don't have a lot of clarity right now in regards to what candidates, you know, first of all, tell you in, in presidential debates nevertheless, what they will actually be able to implement into actual policies, right.

So it's a little bit difficult at this point in time.

But we know that, you know, some of the key components of spending is actually interest, interest uh that the government has to pay on the amount of debt outstanding.

And that is starting to get or money more into that budget, more and more so obviously, it is in the interest of the government to see perhaps lower rates as well.

And that's when you have conflicting views between the FED as well.

If they're really pretty much uh committed to honing in on inflation.