America’s debt problem is too big for the bond vigilantes

America’s Debt Problem Is Too Big for the Bond Vigilantes
America’s Debt Problem Is Too Big for the Bond Vigilantes


Surging deficits and bond yields create an opening, but investors are likely to take a painful hit this time.

Markets can scare even Washington bigwigs straight sometimes, but the latest tumult in stocks and bonds might not get the reaction investors want to see.

One time they did was the early 1990s, when bond yields surged during the Clinton administration in response to budget deficits. In fiscal 1992, President George H.W. Bush’s final full year in office, the shortfall hit a then-record $290 billion. Running on a campaign of fiscal rectitude and warning of disaster, Ross Perot shocked the political establishment by winning 19% of the popular vote in that year’s presidential election.

Investors soon spoke even more loudly than Perot through the bond vigilantes—a term coined by economist Ed Yardeni for traders who vote with their feet. Benchmark 10-year Treasury yields surged from a 20-year low near 5.2% in late 1993 to above 8% a year later in what was called the Great Bond Massacre.


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The federal government within a few years ran its first balanced budget since the 1960s and even a surplus of $236 billion in 2000.

Clinton adviser James Carville summed up the vigilantes’ influence: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."

History rhymes, but it is unlikely to repeat. The 10-year yield has once again soared by 3 percentage points in barely a year to its highest since 2007. And, without a crisis or recession, the budget deficit was $1.5 trillion in the first 11 months of the fiscal year that ended Saturday.


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If bond vigilantes had influence 30 years ago, they certainly could now with gross federal debt more than seven times as high. Net interest payments alone this coming fiscal year will be $745 billion, according to Congressional Budget Office projections. The average interest rate on marketable debt went from nearly 5% before the financial crisis to as low as 1.42% in early 2022, but it is about to cross 3% again and is rising quickly.

This time, though, the vigilantes won’t get far in Congress. Of $6.4 trillion in projected federal outlays in fiscal 2024, only $1.85 trillion is neither mandatory nor net interest. Of that, about half is defense—a vexing category to trim, even in peacetime. Making draconian cuts to what is left would cause a public outcry and still wouldn’t be enough.

Tax hikes could make more of a dent. The left-leaning Center for American Progress points out that, if taxes as a share of the U.S. economy were to rise to just the average among developed economies, the budget would take in $26 trillion more in revenue over the coming decade, based on CBO projections. That is unrealistic, though.

So are the CBO’s projections: They see average interest rates reversing and no recessions. Adding just a percentage point to their assumed rate would contribute about $3.5 trillion to federal debt by 2033, according to Wall Street Journal calculations.

What is a poor deficit hawk to do? There is one more part of the federal government that can act. Strategists at GlobalData TS Lombard point out that there have been two ways to deal with unsustainable government debt over the years—the orthodox approach of austerity and reform or the unorthodox one of default, inflation or financial repression. For the U.S., actual default is fortunately off the table because it borrows in dollars. But some combination of inflation and repression might be necessary if deficits and rates stay near current levels.

Inflation is called the cruelest tax because it erodes the wealth of savers, including people who live off their savings. It can artificially boost government revenue and reduce the real value of borrowings. Repression means the government’s forcing interest rates to stay below the rate of inflation as a way to transfer wealth from the private sector back to itself.

Bond bulls are now giving up, says George Goncalves, head of U.S. macro strategy at MUFG Securities. He thinks that if interest rates just stay at current levels beyond a year or so, interest costs will become a strain on government finances. But rates also could fall without repression, because of the drag they are now exerting on the U.S. economy, forcing the Fed to ease.

Thanks in part to the bond vigilantes, the late 1990s were great for bond investors and epic for stocks. The coming years could look very different.

Write to Spencer Jakab at

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