The Rise of Equity Vigilantes
Authors & Contributors
Bond vigilantes have historically held policymakers accountable, but recent market shifts indicate that equity markets may be the ones whose actions effect policy change.
What does it mean to be a bond vigilante? The term was coined in the 1980s to describe investors who offload bonds in protest of fiscal or monetary policies deemed as inflationary, driving yields up and increasing borrowing costs for government issuers.
Fast forward to March 2025 – the US Treasury bond markets are broadly calm and in balance despite rising upside risks to inflation related to expected policy shifts in four key areas: trade, regulation, taxes and immigration. All this against the backdrop of a Federal Reserve (Fed) that continues to signal additional rate cuts this year. The yield on 10-year US Treasury Notes closed at 4.43% the day after the election, rose to a high of 4.79% in January just before the Inauguration and fell to 4.24% following the Fed’s latest policy meeting on March 19. Falling yields do not seem to suggest that an inflation shock is imminent but are instead consistent with a broader risk-off move.
Economic Policy Uncertainty and the S&P 500®
Are equity markets taking on the vigilante role instead? Following Election Day, market enthusiasm drove US equity market valuations to all-time highs on February 19. However, between then and March 19, the S&P 500® and the Nasdaq-100 have fallen by 7.6% and 11.0%, respectively. Although US equity markets experienced a relief rally following the Fed’s rate decision on March 19, investors remain sensitive to announcements on the new administration’s economic policies, especially tariffs.
While President Trump often pointed to the performance of US equity markets as a measure of success during his first term, this has not been the case in the early days of the second term. Rather, the administration has been clear that they are taking a Main Street versus Wall Street approach, focusing more on housing costs, gas prices and mortgage rates. Equity market swings have been shrugged off until this point, but the market reaction may be more significant if bond vigilantes join the fray. A sustained rise in longer-term rates like 10-year Treasuries and mortgages could be hard to ignore.
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