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2023 Q3 Commentary Thumbnail

2023 Q3 Commentary

The Return of The Bond Vigilantes? 

The story of this year has been the persistent rise in interest rates. This trend, especially amongst longer-term bonds, really began to accelerate in September into early October as the yield on the 10-Year Treasury Note surpassed 4.8%. This sustained rise in rates rattled financial markets resulting in a stock market correction and prompting some to consider whether the bond vigilantes were back. What is a bond vigilante? Investopedia defines them as follows:

“A bond trader who threatens to sell, or actually sells, a large amount of bonds to protest or signal distaste with policies of the issuer. Selling bonds depresses their prices, pushing interest rates up and making it more costly for the issuer to borrow.”

The term was originally coined in the early 1980s when investors sold bonds aggressively in response to rising inflation and lax monetary policies. While inflation has certainly been a problem these past few years, the Federal Reserve (the Fed) is being anything but lax, having raised interest rates at one of the fastest clips in history to tighten financial conditions and tame inflation. If the Fed is on the road to crushing inflation, why would the bond vigilantes reappear now? The answer may stem from the budgetary situation of the United States. One market observer recently highlighted the current situation in his daily missives.

“Total US debt has jumped by $100 BILLION since it crossed $33 trillion exactly one week ago. That’s $14.3 billion PER DAY being added to US debt over the last week. Add in ~$3 billion per day of interest expense and that’s over $17 billion per day. Meanwhile, deficit spending has become so large that the US is issuing nearly $2 trillion in bonds over 6 months which is driving rates higher. Simultaneously, the US is refinancing debt at current rates which have more than doubled. …”[1]

“US national debt has jumped by nearly $1 trillion per month since the debt ceiling “crisis” came to an end in June. Total US debt is now up $10 TRILLION since 2020. To put this into perspective, it took the US 232 years to add the first $10 trillion in debt. The worst part? The debt ceiling is effectively UNCAPPED until 2025 in the latest debt ceiling agreement. …”[2]

What makes this even more worrisome is nearly 33% of all outstanding U.S. debt is set to mature in the next 12 months and 52% within the next 36 months. Since this debt was last financed, debt service costs have more than doubled. If interest rates stay higher for longer as the Fed has indicated, this would translate into the interest expense on the national debt rising to north of $1 trillion or roughly 20% of total tax revenue. Given the above and the backdrop of continual chaos and infighting in Washington, it seems quite reasonable the bond vigilantes may in fact be back and voting their displeasure by selling bonds and demanding higher interest rates for the continued privilege of loaning money to the United States.

While the debt and associated financing cost is certainly a concern and something we are paying close attention to, there are also some relative bright spots. First, the economy has outperformed most expectations this year by growing 2% or greater. Second, the labor market has remained very resilient despite a series of interest rate increases by the Fed. Third, higher interest rates have increased the ability of companies and individuals to earn much higher income on fixed income investments and short-term funds. Finally, headline inflation has fallen by two-thirds, from a peak of 9.1% to 3% on a year-over-year basis. This has led many to believe the Fed may have engineered a soft landing for the economy and avoided a recession. That may be, or it may be the lagged effects of the monetary tightening have not yet funneled through the economy. Only time will tell.


While we may have strong opinions, those must be tempered by the humility of knowing that neither we nor anyone else can consistently predict the future. Instead, our focus remains on constructing diversified portfolios that can withstand different outcomes all with the aim of compounding your capital over the long-term.

As always, we remain committed to helping you achieve your financial goals.

  1. https://twitter.com/KobeissiLetter/status/1706411948986847727
  2. https://twitter.com/KobeissiLetter/status/1705745144887337003

The opinions expressed are those of PYAW’s Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed. 

PYA Waltman Capital, LLC (“PYAW”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about PYAW’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.  PYA-23-42