The Bond Vigilantes

There's been some talk recently of the return of the so-called bond vigilantes, investors who look to punish the federal government for their profligate ways. Who are these bond vigilantes? The term was coined back in 1983 to define investors who sold off massive amounts of government debt when they saw inflation ahead. What makes them vigilantes is that these sales were supposedly protests against inflationary policies, rather than pure investing decisions.

But that may not be the right way to look at what these people are doing. Most investors are far more interested in their monetary returns than they are in protesting anything the government is doing. If large groups of investors are staying away from Treasury bills, it's probably for the simple reason that they fear inflation will drive down their prices. The Treasury then has to offer higher yields to get investors to buy its bonds, driving up the price of borrowing, and starting a vicious cycle.

Fed chair Ben Bernanke has tamped down some of the bond vigilantes' fears by keeping short-term interest rates at near-zero levels, which has helped tamp down inflation to near-zero levels as well. So are these vigilantes concerned about inflation, or simply concerned about the value of Treasury bills? It might well be the latter.