Bond Vigilantes
All Eyes on Bonds
“You mean to tell me that the success of my program and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?” — Bill Clinton
On Friday, February 12, 1993, Bill Clinton assembled key advisors for a meeting in the Roosevelt Room of the White House. He’d been president for less than a month and was due to make a speech at a joint session of Congress the following week to lay out his economic plans for the next four years. He had plenty of spending proposals but advisors cautioned that it was critical that he first focus on deficit reduction. As the first Democrat to take office in 12 years, they were responding to concerns that he could overturn the anti-inflation consensus of the 1980s. A target of $140 billion was presented as a cut large enough to impress the market. Not everyone was happy.
“How many votes does the fucking bond market have?” Clinton’s chief lobbyist with Congress asked, according to Bob Woodward’s account of the administration. “We’ve got to win votes on the Hill, not Wall Street.”
Others were steadfast and Clinton came round to their way of thinking. He hadn’t run against the deficit but he proposed a plan to attack it. In his mind, interest rates had been too high for too long and by doing what he could to bring them down, homeowners could refinance their mortgages and businesses could expand. “All the folks that I ran to help would be more hurt by a slow economy than they would be helped by a marginal extra investment program,” he said later. He was not trying to help the bond market, he claimed: The bond market was just the vehicle for helping the middle class.
It paid off (for a period anyway). After he made his speech, long-term interest rates fell to a 16-year low. James Carville, Clinton’s campaign strategist, had some 30-year bonds he’d bought for his retirement account when interest rates had been as high as 8.75%. He sold them as rates moved below 7% for a 50% gain. The bond market’s influence became clear. “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter,” he said, famously. “But now I want to come back as the bond market. You can intimidate everybody.”
Carville now writes a substack and although he has yet to comment on the current president’s skirmish with the bond market, he has views. It’s not as if the Trump administration has a wildly different take on bond markets from Clinton. “The president wants lower rates,” Treasury Secretary Scott Bessent said in an interview in February. “He and I are focused on the 10-year Treasury and what is the yield of that.”
Yet the tariff proposals have roiled the bond market. From a starting point of 4.11% 10-year yields initially fell to 3.86% when tariffs were announced before rising steeply to 4.48%. It was this spike that convinced Trump to pause the implementation of his tariffs. “The bond market is very tricky, I was watching it. But if you look at it now it’s beautiful,” he said afterwards. Unfortunately, it’s no longer looking quite so beautiful. The 10-year is close to 4.5% again, having mounted its largest three-day surge since 1982.
How significant is this? Thirty years after bond vigilantes forced Bill Clinton to reshape his economic agenda, they may be staging a comeback. But in a world of complex leveraged trades and a Federal Reserve armed with new tools, the mechanisms of market discipline have changed dramatically. To understand how today’s government bond market operates – and why it matters – read on.