‘If reincarnation exists, I would like to come back to earth as the bond market. You can intimidate everybody.’ —James Carville, advisor to Bill Clinton.
Shareholders possess a powerful tool to influence the direction of the companies they invest in: voting rights. Bond investors, by contrast, lack this formal mechanism—but they are far from powerless. As the Trump administration is currently (re)discovering, bondholders can exert formidable influence in their own way.
he term ‘Bond Vigilantes’ was coined in the 1980s by economist Ed Yardeni to capture the unique power of the bond market. When governments pursue lax fiscal and budgetary policies that fuel inflation and deficits, these vigilant investors can punish them by selling off government bonds, driving yields higher and increasing borrowing costs. The U.S. Treasury learned this lesson the hard way in the early 1990s, during a period of twin deficits and mounting concerns over rising government spending under the Clinton administration. The result: the 10-year Treasury yield surged to nearly 8% in 1994, up from around 5% just a year earlier.
For several decades, the growing intervention of central banks in financial markets muted the influence of the ‘Bond Vigilantes’. However, their presence has returned in the early 2020s, as inflation and public deficits have reemerged as pressing concerns. In recent months, both the pressure on policymakers and U.S. Treasury yields have intensified. The ‘Bond Vigilantes’ are back in action. While they may not gather in secret to plot their moves, their collective response to perceived fiscal missteps is swift and impactful. As a result, greater fiscal discipline—often enforced through painful market adjustments—has become indispensable.
Investor anxiety is now evident across multiple segments of the U.S. market. Despite the Federal Reserve’s accommodative stance, yields have soared: the 30-year Treasury yield has climbed above 5%, and the 10-year yield is hovering around 4.5%.
At the same time, the gap between interbank rates and government bond yields—known as swap spreads—has plunged deeper into negative territory, currently at -0.55%. In practical terms, this means investors now demand an extra 0.55% to lend money to the U.S. government for ten years compared to entering into an interest rate swap of the same maturity. Corporate bond spreads are following a similar trajectory. For U.S. investment-grade companies, the average spread is now at the lower end of the past five years, around +0.91%.
Borrowing in the domestic market is becoming less appealing. Yields are high and volatile, as is the dollar. Adding to the challenge, Moody’s has stripped U.S. Treasuries of their AAA rating, and concerns about the mounting debt burden are intensifying. According to the Congressional Budget Office (CBO), the annual cost of servicing the federal debt could soon surpass the defense budget ($870 billion versus $895 billion). Tax cut ambitions only add to the pressure. As Republican Congressman Warren Davidson succinctly put it: ‘Growing deficits grow default risk.’
In response, many leading U.S. corporations are turning to Europe to issue debt, attracted by greater stability, lower yields, and robust demand—especially as the European Central Bank is poised to continue lowering its key interest rate.
Take Pfizer as a case in point. In 2020, the pharmaceutical giant issued a 10-year dollar bond with a risk premium of 185 basis points above the U.S. Treasury yield, resulting in a 2.625% coupon. By 2023, Pfizer returned to the market with a tighter risk premium of 125 basis points—reflecting improved credit quality—but the coupon had risen to 4.75%. The explanation? The 10-year Treasury yield had climbed sharply from 0.70% to 3.65% over three years.
Today, with an even lower risk premium (85 basis points), Pfizer would face a coupon of 5.30%.
In May, Pfizer opted for a different strategy, tapping the European bond market to issue €750 million in 12-year notes with a 3.875% coupon. While this introduces currency risk, Pfizer’s global footprint and euro-denominated cash flows allow it to manage these exposures effectively. The difference is striking: total interest expense on the euro bond is around €290 million, compared to nearly $400 million had the issuance been in dollars.
So far this year, U.S. issuers have raised more than €83 billion in the European market—a 35% increase over 2024, marking the fastest growth on record and accounting for 14% of all euro-denominated issuance. Most notably, for the first time ever, there is now more U.S. corporate debt (Reverse Yankee) than French corporate debt circulating on the European bond market.
If the ‘Bond Vigilantes’ are pushing U.S. Treasury yields to new highs, American companies benefit from declining risk premiums and the opportunity to access favorable financial conditions across the Atlantic. For bond investors, this also represents a boon in terms of diversification and options.
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