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- An "epic clash" between bond vigilantes and world leaders is coming, Ruchir Sharma said in the FT.
- Next year will see dozens of national elections, which usually means spending splurges before the vote.
- "Taking on the bond vigilantes is mostly a losing battle but that won't stop many politicians from trying."
With a record year of national elections coming up next year, one market expert expects a brawl between unthrifty politicians and anxious bond investors.
In an opinion column for the Financial Times, Rockefeller International Chair Ruchir Sharma said the opposing goals of so-called bond vigilantes and world leaders means "an epic clash is brewing in 2024."
"In a boom year for elections, with national contests from the US to India, incumbents seeking another term will be tempted as always to ramp up public spending before the vote," he wrote in Monday's piece. "That puts them on course to collide with the global bond vigilantes who, reawakened from a long slumber by the new era of high interest rates, will be quick to punish profligate politicians."
Before now, governments could usually get away with spending binges because borrowing costs in the past decade were much lower, especially as central banks bought bonds and kept yields low.
But central banks have since shifted, ending bond purchases and bumping up interest rates to hose down spiraling post-pandemic inflation. That's brought the bond vigilantes back, wary of ballooning deficits.
"[If] the money flows too freely, the newly alert vigilantes will show up to spoil the fun, selling off the nation's bonds and currency," he wrote. "Many governments, having run up massive debts during the pandemic, are particularly vulnerable to these attacks now."
The term bond vigilantes was coined in the 1980s by economist Ed Yardeni, who wrote about investors triggering a bond sell-off to rein in untamed government spending. That indeed happened in the 1990s when concerns about swelling US deficits drove Treasury yields as high as 8%.
And now, with ballots in more than 30 nations coming up, the risk of spending splurges in a high-interest-rate era has bond vigilantes on edge again, Sharma wrote.
He noted that six countries where deficits are above the "danger zone" threshold of 5% of GDP will hold elections next year, including India, South Africa and the US.
Meanwhile, bond vigilantes have already claimed victories in the UK, Brazil and Turkey, forcing the governments there to embrace more fiscal restraint, he pointed out.
"Financial markets are now so large, dwarfing any national economy, that the vigilantes usually prevail. Leaders take them on at their own risk," Sharma warned, later adding, "Taking on the bond vigilantes is mostly a losing battle but that won't stop many politicians from trying."