How "Bond Vigilantes" Work (Part 3 of 3)
- IGV
- Apr 2
- 10 min read
Updated: Apr 3
TakeAway: The Bond Markets are basically the National Loan Sharks. We have to go to them, because we have no other option, with cap-in-hand, and ask for more money, and if they don't like us they can demand extortionate interest rates which will impoverish us as we attempt to pay them back. The answer – for any government of the left or right – is to find a way to render the bond markets (aka the national loan sharks) far less central to the public finances.
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The front cover of The New Statesman of 21-27 November 2025 was titled "Meet the Bond Vigilantes: The traders who control the Budget". (1)
The story inside, by Will Dunn, was titled "What the bond markets want: Meet the traders who have taken over politics". The sub-title on its website says "Governments are now at the mercy of unseen investors".
The point is clear. Democratic governments are being undermined by the bond markets.
Surely this is an important democratic issue?
What's the point in voting for a government if the bond markets can dictate its policies, and even bring it down?
It was this article which inspired us to write this 3-part Policy Document.
Like much "financial commentary", the article was using terms and phrases which presumed considerable prior knowledge of how these bond markets actually work.
That's why we wrote the second Policy Document in this series – which explains all the critical terminology (or secret code language, if you prefer). It explains the relationship between bond prices and "yields" in the "secondary market".
As Dunn puts it in his article (our emphases):
This interaction between prices and yields lies at the heart of Britain's debt dilemma today. When investors judge that a chancellor's decisions are likely to mean higher inflation or higher borrowing, investors pay less for gilts and yields increase. And so, the state has less money to spend on public services.
To flesh that out (and as we said in our second article): When yields in the secondary market increase, it means that the new bonds issued by the government in the primary market are going to be released at higher fixed interest rates.
This means that the government will have to find even more money to pay the interest on these bonds – which it will do by continuing to raise taxes and/or cut spending.
It will also borrow even more – "refinancing the debt" or "rolling it over" – by issuing even more bonds to get even more money from the bond market. The latter is "borrowing from Peter to pay Paul"; it's solving one debt by incurring another!
Why do Investors Dislike High Government Borrowing, and Inflation?
Investors will always see high government spending as potentially inflationary (even though that is not necessarily so, since that can depend upon what the money is spent).
Investors are going to be worried about inflation because inflation reduces the value of their assets, whether these are the bonds themselves, or other assets which they hold in the economy.
They are also worried that a large National Deficit (the difference between the money it can raise from taxes and the amount it needs to spend) is calling into question the government's ability to pay back the bonds in the long-term.
Therefore, in order to mitigate the financial risk of holding these bonds, the investors will "demand" higher fixed interest rates for the bonds which they're buying in the primary market.
For now, first-world governments such as the UK have been able to continually pay back the debt by simply "rolling it over" (borrowing even more to pay it off), largely because the political system is relatively stable, and investors have "confidence" in it continuing – unlike "failed states" in the developing world.
Investors can also be concerned that a government is not "growing the economy" in a way which will provide the increased taxes which can be used to pay back the debt on the bonds.
Basically, investors who are upset with a government, for the above reasons, will try to exert "market discipline" and make the government "tighten its belt", by which is meant more tax increases and more spending cuts! These are what we know as "austerity measures".
What is "Fiscal Discipline" (aka Fiscal Probity, Fiscal Stability)?
This refers to a government's ability to "manage its finances". This requires aiming to ensure revenue-in covers expenditure-out (which is called "balancing the budget").
It also refers to being able to "manage the debt", which means being able to pay back the interest payments and principal without borrowing too much more.
This perpetual effort to find some kind of balance which encourages "economic growth", and at the same time doesn't make inflation worse is known as exercising "fiscal discipline".
There's always a Potential Conflict between Bond Markets and Governments
Investors are not going to buy bonds if they foresee major political problems coming down the line. This may be a result of a government which lacks talent to manage the economy properly, or is split against itself, or is failing to get its MPs behind its policies, or is likely to collapse.
As one fund manager, who is quoted in Dunn's article says:
"A government that can't cut spending, can't tax in a meaningful way, opens up all kinds of unknowns in terms of regarding future revenues and growth…and it leaves extra borrowing to pick up the slack."
Whether he realised it or not, he is telling us that it is in the interests of the bond markets to always tend to want to see government spending cut, because they fear it is inflationary and thereby damaging to their assets. And they tend to want to see taxes raised! These are the two ways which they believe will enable them to get back the money that's owed to them.
However, there is clearly a potential conflict here between the interests of the bond markets and those of the democratically-elected government and its policies! For example, some governments will want to "slash taxes", while others will want to "increase public spending".
What is the Goal of a Bond Vigilante?
The goal is to force a change in policy, or bring down a particular politician, or government by making it more difficult and more expensive, for them to borrow money. They aim to force up the government's borrowing costs in order to make it harder to finance its policies.
In the Worst Cases, there can be a Malign Desire to Destroy a Politician, a Government, and even a Nation
Bond vigilantes within the bond markets will attack anybody, for anything, if they perceive their "assets" to be threatened by "inflation" or any other excuse – regardless of how good the ideas happen to be or the intentions of the government.
Some investors – particularly the extremely wealthy ones who hold large amounts of bonds may deliberately try to bring down a particular politician, or the government, or hurt a nation, or even destroy a society, by causing a financial crisis whereby the government is unable to raise money for its purposes.
What Tactics will Bond Vigilantes use to Force Changes in Policy, Politicians, or Government?
They will seek to drive down bond prices in the secondary market by selling their bonds.
This can be referred to as "dumping" existing holdings of bonds. This means that because there is a "glut" of such bonds, then supply is now greater than demand and the price of these bonds in the secondary market will fall.
This means their yield will rise, and as we said in our second Policy Document in this series, this higher yield now translates into pushing up the fixed interest rates of the bonds in the primary market.
This means the government now has to find the money to pay the higher fixed interest rates on these bonds. That is, "the cost of government borrowing increases". This additionally forces the government into "austerity measures" such as raising taxes and cutting spending; and borrowing even more.
These "rising yields" can signal to other traders that there is a problem. This can lead them to sell off their bonds also.
This can trigger a full-on "panic" in the market. This can create instability in the wider economy as confusion reigns about potential new interest rates, and tax rises, and potential government cuts to sectors which rely upon government funding.
Higher fixed interest rates on bonds in the primary market can also lead to investors moving away from their investments in Company Stocks, and to the better interest rates offered by the government bonds. This can lead to a crisis in private company funding.
All of this can bring down politicians and governments.
We saw this happening with Liz Truss's premiership in 2022. Investors were concerned that the tax cuts were "unfunded". That is, they believed the government revenue which would be lost by the tax cuts could not be found anywhere else. They were worried that the money would not be there to fund the bond repayments.
Bond Vigilantes can also go on a "Buyer's Strike"
They can refuse to buy new government bonds. This forces the government to offer the bonds at even higher fixed interest rates to attract buyers, which again triggers higher taxes and more spending cuts; because the government is going to need to find the money to pay back these higher interest payments.
From the above we can see that many bond traders are simply looking out for what they believe are their own economic interests.
However, there is also no doubt that those who hold massive amounts of a nation's government bonds can sell them off in the market in order to deliberately trigger chaos – by lowering the price of the bonds in the secondary market, increasing their yield, and thereby causing fixed interest rates to rise in the primary market – which will increase the cost of government borrowing requiring even higher taxes and even less public spending!
In this way, democratically-elected governments, and politicians, can be deliberately brought down by "the markets".
A British Government can be Brought down by Investors who are not even British!
Considering the international nature of the bond markets, and the fact that foreign investors and countries can purchase British government bonds, then selling such bonds to such people – aka borrowing money from them – is very risky for us.
At present, overseas investors hold approximately 25-30% of total UK government debt!
Even off-hand comments from Politicians can Translate into Selling Bonds
If a politician says something that makes the investors think that he or she is reckless with spending (leading to possible inflation); or a political opponent of the very idea of bond markets; or is opposed to the sorts of people in the bond markets; or says something that suggests a larger political problem is brewing; then the bond markets can react by selling bonds.
As we say, this will raise yields, which will put up the costs of government borrowing; which will require the government to put up taxes further and/or cut even more spending.
In his article, Will Dunn gives an example:
Two months later, Andy Burnham told the New Statesman that he believed Britain should not be "in hock to the bond markets". Gilt yields rose in response and a Treasury source told the magazine that Burnham's comments had cost the government £1.5bn in fiscal headroom. But it wasn't Burnham's recklessness that caused the markets to stir. It was the fact that a government with the largest majority for 25 years appeared already to be collapsing into infighting.
"Fiscal headroom" is the term used to describe the available financial space to raise or lower taxes, or raise or reduce spending, in order to keep the government within its self-imposed limits, usually measured by the debt-to-GDP target.
In the above example it means that as a result of the bond market's reaction to an off-hand comment from a politician, the government is going to have to find an additional £1.15bn in taxes to pay for the higher fixed interest rates on the bonds which has resulted from that comment (or find that money via new spending cuts) – if it is to stay in alignment with its current Fiscal Rules.
Think about the extent that a casual comment directed against the bond markets cost the taxpayer £1.5bn. Really? How can a society function like this? The power of the bond markets is ridiculous.
Dunn concludes:
Much of the volatility we see in bond markets is out of the government's hands. Investors choose between the debt of different countries, and the UK bond market is small compared with those of the US and Europe. This means it does not enjoy the same privileges. America's debt is the currency of global commerce, so the US can run up immense debts – it is in hock to the bond markets, as they say, for $38trn – and people will still queue up to lend it money (for now). France is fiscally profligate, but its position in the Eurozone gives it shelter.
Britain is a smaller, less liquid market, and it has to be more careful. As a smaller market we should beware, a strategist told me, "the vigilante bully in the playground". Investors have to hold a certain amount of someone's debt…but the UK, with its dependence on foreign bondholders, cannot afford to take fiscal risks. We do not want to become an example, they said, of what happens "once the markets establish that you are the weakest link".
As James Frayne wrote
The public finances are in a dire state and with much of our national debt held offshore, sceptical outsiders have the power to inflict serious trauma on our economy. In short, if the markets don't like our economic policy, they can force a change. Given that both Tories and Labour have allowed public spending to rocket – particularly on welfare – it's perfectly possible to imagine the markets will demand a serious course correction. (2)
In the next Policy Document we look at what can be done to create the national wealth which ensures we don't have to rely on borrowing from the bond markets and making ourselves vulnerable to the Bond Vigilantes.
References
1. Will Dunn, "What the bond markets want: Meet the traders who have taken over politics", The New Statesman, 21-27 Nov 2025, pp22-25, at newstatesman.com/business/economics/2025/11/meet-the-bond-market-vigilantes
2. James Frayne, "Ed Miliband and PM with Zack Polanski as his deputy? It's not as crazy as you think", Daily Telegraph, 27 Dec 2025, pp 20-21 at 21 at telegraph.co.uk/news/2025/12/27/prime-minister-ed-miliband-zack-polanski-deputy-predictions
Further Reading in this Series
How "Bond Vigilantes" Work (Part 3 of 3)