The chart below is not indicative of the widening in the sovereign credit of some backwater PIIGS country. It shows the rather substantial move higher in 10 year British Gilt yields over the past week.
Are the bond vigilantes slowly but surely (and as very much expected) moving from the periphery, where all the low hanging fruit has been picked, to the core, where the acceleration is only just starting? To be sure, the Gilts are easy targets: with QE unanimously voted out, and increasing budget deficit, there is little to like.
The Guardian has more:
"The market is upset about that – the UK budget deficit is an issue, everyone wants to know what the government plans to do," said Jim Leaviss, head of fixed interest at M&G Investments. "We need to do something, otherwise we're in big trouble."Leaviss runs a website called Bond Vigilantes – reviving a term coined in the 1980s in the US when activist investors sold bonds en masse, pushing yields up, and forcing cuts in the US deficit.
"The bond vigilantes are the most important people in the capital markets right now – they're back and they'll punish the weak," said Gary Jenkins, a credit analyst at Evolution Securities. "The bond market is the single most important market and will determine what the other markets will do: the key question this year is: will sovereign countries be able to finance themselves at a rate that's reasonable? If so, markets will develop. If not, everyone has a problem."
The bond vigilantes are punishing countries with high budget deficits, such as Britain, the US, Greece, Spain, Italy and Portugal, on concerns about their ability to recoup loans. Far from declaring themselves speculative opportunists, the punishment comes against "governments that have lost control of their public finances", Leaviss said, as he iwarned governments to get public spending under control.
"We're reflecting the reality that developed nations need to sort out their budget problems. Otherwise, there's potential default, or inflation," he said.
After a few days of calm, the cost of insuring British, Greek, Spanish and Portuguese debt against default rose again, according to data from Markit. Greek bond yields also leapt after a German official said that "not a penny" should be lent to Greece. The comments contrast with the EU's assurance last week that it would stand by the country.
"The EU politicians should speak on one voice if they want the bond market to calm down," Jenkins said.
The vigilantes are watching indeed.
If the UK goes, Germany itself can't be too far behind. If Gilts are about to be Friend-O'ed, don't look for Bund love too far from Newport Beach's Fashion Island.