Trump might just wake up the 'bond-market vigilantes'

Is inflation making a comeback? Federal Reserve policy makers hope so. As bond investors brace for higher inflation, the 10-year Treasury yield has spiked more than one percent since July.

Now the market is deciding if wider budget deficits will reawaken deficit hawks known as "bond-market vigilantes."

In late 1993 professional bond traders, concerned about federal spending's impact on the budget deficit, held a buyers' strike, thrusting the yield on 10-year Treasury notes from 5.2 percent

to just over 8.0 percent in less than two years.

The Clinton administration and Congress made a political about-face, reducing the deficit in response to high rates. That prompted James Carville, advisor to President Clinton to declare, "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."

While there's a much larger international bond market nowadays thanks to a global glut of savings, bond market vigilantes could make a comeback should the Trump administration's plans to cut

taxes and expand government spending result in big fiscal deficits.

In the event that the vigilantes return, real rates, the yield bond investors require over and above the rate of inflation, would rise. This "distrust premium" would raise government

borrowing costs. Historically, bond markets stumble as real rates rise.

Over the last decade or more, fixed-rate bonds, inflation-protected Treasury securities (TIPS) and gold have lost ground on average against a backdrop of higher real rates. The of large-cap

stocks historically advanced as real rates widened, owing perhaps to the stimulative effects of fiscal spending.

The Trump administration's policy blueprints point to wider federal deficits. Perhaps bond market vigilantes could circle the wagons again.

Commentary by Jack Ablin, the chief investment officer at BMO Private Bank. He is also the author of "Reading Minds and Markets." Follow him on Twitter @jackablin.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.

Sign up for free newsletters and get more CNBC delivered to your inbox

Get this delivered to your inbox, and more info about our products and services.

© 2025 CNBC LLC. All Rights Reserved. A Division of NBCUniversal