Page 26 - Spring 2025

BASIS POINTS
Vigilante jus�ce?

Financial markets react quickly to policy changes

BY JIM REBER

is making no promises about
While it will possibly take months and even the rest of
the year to see the full shakeout, April 2025 was a laboratory for further rate cuts (or rate hikes, for
market efficiency. Some might contend there was an element of that ma�er), investors have begun
ruthlessness in the ac�vity. Star�ng even before the Trump to factor in an addi�onal cut or two in
the 2025 numbers. So why the
administra�on’s trade policy tariffs went into effect on April 2, the
steepening?
“Bond Vigilantes,” a nebulous gang of ins�tu�onal debt investors,
started shoo�ng up the place.
Our “friends,” the vigilantes, are protec�ng themselves against
more infla�on deteriora�on. They are investors, by and large, at the
Barely a week a�er so-called “Libera�on Day,” the U.S. bond
long end of the curve, which is only marginally influenced by the
market—par�cularly the longer tenors—had administered its brand
Fed’s monetary policy, as long as that does not include open market
of fron�er jus�ce. The 10-year note, which has an outsized effect
on the economy due to its correla�on to mortgage rates, rose opera�ons. The Fed has recently confirmed it will con�nue to wind
nearly 50 basis points (0.5%). At the same �me, and tellingly for the down its balance sheet, albeit at a slower pace than in 2024. At the
mood of consumers and the broader global economy, all the major short end of the curve, yields didn’t run up as much in the April 2
a�ermath, since the Fed has reiterated its “data-dependent”
stock indices retreated. It’s not o�en that debt and equity markets
posture. This steepening, in essence, was building in the increased
move in tandem; more o�en than not, they travel in opposite
direc�ons. possibility of both a slowing economy and doubt about maintaining
stable prices.
Couldn’t help no�cing
Law…and order?
The term “bond vigilante” was coined by legendary economist Ed
Yardeni in the 1980’s, when long-term yields were soaring far into The fiscal “discipline” by both bond and stock investors caused the
double-digit territory. It connoted investors who were uber- administra�on to walk back some of the harshest rhetoric
hawkish on infla�on, and were ready and willing to sell their regarding tariffs. A�er yields rose every day between April 4 and
holdings and drive prices down/yields up un�l they were sa�sfied 12, they actually retreated the remainder of the month. The two-
year note’s yield fell about 26 basis points for April, while the 10-
that they were being adequately compensated for their price risk.
There have been several periods in the 21st century when the year note fell about three basis points. It’s a fair to say part of the
vigilantes were barely visible, especially following the Great return to rela�ve calm was the administra�on so�ening its
Recession and during the COVID-19 pandemic. commentary on the removal or firing of Fed Chairman Jay Powell.
The major stock market indices, all of which were down by
double-digit percentages mid-month, ended up basically
The term came back into vogueish use in 2022 as prices of goods
began spiking year-over-year in the 8% range, and the Federal unchanged between +1% and -3%.
Reserve was hiking short-term rates every chance it got. We s�ll
haven’t seen infla�on back in the 2% box the Fed has set as its The takeaway? Whether you consider yourself a bond vigilante or
merely an observer, it’s clear that they’re back—and watching. The
objec�ve. By some measures, infla�on is picking up steam, so the
gang also has shown it s�ll has enough collec�ve clout to move
vigilantes have remained on no�ce. The very real consequences of
protracted trade wars, the worst of which could include price hikes bond market yields, and influence monetary, fiscal, and trade
accompanied by weaking labor markets, have go�en the a�en�on policies. Those who choose to tangle with this notorious bunch had
of the infla�on hawks, to say be�er pack a lunch—it could be a long slog.
___________________________
the least.
Jim Reber is president and CEO of ICBA Securi�es, ICBA’s
ins�tu�onal, fixed-income broker-dealer for community banks.
Dura�on divergence
Another interes�ng development following April 2 is the steepening ICBA Securi�es is an ACB Preferred Solu�ons Provider.
of the yield curve to levels not seen since 2022. To be sure, a 50-
basis point slope between “2’s and 10’s” does not qualify as steep.
However, while the Fed has very carefully chosen its comments and

Arkansas Community Banker | 26 | Spring 2025