Market Overview : May 2025

The return of the bond vigilante · 13 Mai 2025

Why American long rates reacted?

One of the most cited explanations for the U.S. administration's U-turn on tariffs is the rise in interest rates.

Last month, the American bond markets experienced a shock of rare intensity. The yield on 30-year government bonds even exceeded 5%, posting a weekly increase not seen since 1987. This sudden movement was caused by the announcement of new tariff measures perceived as inflationary. Usually sought after as safe havens, they were massively sold, leading to a rapid rise in long-term rates. Faced with the rapid rise in long-term financing costs, the American administration was forced to review its position. The announcement of a tariff break temporarily calmed the markets and the rise in interest rates.

This rapid correction highlighted the sensitivity of financial markets to certain budgetary imbalances and inflation. A massive sale of bonds, and therefore a rise in interest rates, is a warning signal for any government. Rising bond yields force governments to pay more to borrow. If a government continues to borrow while yields are high, interest payments on its debt will soar, effectively increasing the government's financing costs. This stress on the yield curve reminds us that economic and trade policies are never neutral for bond investors.

For American economist Ed Yardeni, Trump's turnaround illustrates once again the potential influence of "bond vigilantes", even if it is today difficult to assess the real impact in the vast government bond markets. Ed Yardeni introduced the term bond vigilantes in the 1980s, in a research report titled Bond Investors Are the Economy’s Bond Vigilantes. This term refers to investors who massively sell bonds in order to put pressure on governments whose fiscal or monetary policies they consider imprudent. He asserted that if the authorities do not regulate the economy effectively, the bond markets will take care of it.

In conclusion, bond investors can play a protective role when economic fundamentals are disrupted. However, the term “bond vigilante” is above all a way of illustrating the pressure sometimes exerted by financial markets, which are driven by a multitude of factors, on certain political decisions.For American economist Ed Yardeni, Trump's turnaround illustrates once again the potential influence of "bond vigilantes", even if it is today difficult to assess the real impact in the vast government bond markets. Ed Yardeni introduced the term bond vigilantes in the 1980s, in a research report titled Bond Investors Are the Economy’s Bond Vigilantes. This term refers to investors who massively sell bonds in order to put pressure on governments whose fiscal or monetary policies they consider imprudent. He asserted that if the authorities do not regulate the economy effectively, the bond markets will take care of it.

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Market Overview : May 2025 Survol des marchés : Mai 2025