Bond vigilantes – just who are they?

Contrary to what most people think, the investors who have pushed Ireland to the edge of the precipice are not evil speculators or hyperactive yuppies trying to grab a few millions more. They are undoubtedly highly paid, but they are cautious professionals who tend to work for big financial institutions that manage assets around the world and in whom we trust billions from our pension funds. These investors — often dubbed the "bond vigilantes" for their activism — are traditionally more conservative than those who put their money in shares. Unlike stocks, bonds repay a fixed interest at the end of their life, and their value doesn't swing as dramatically as the stock market does. Bonds are for widows, orphans and the financially conservative, while stocks are for young people with time to overcome any losses, or so the thinking goes. This makes the bond market many times bigger than that for shares. As guardians of safer value, bond investors demand their money back, and will charge higher interest to a borrower if they see any risk. A few years ago, it was unthinkable that a country would go bust, making the sovereign bond market deadly boring. Prices barely moved and countries paid on time. But this all changed when nations such as Greece, Ireland, Britain and Spain allowed their banks and saving institutions to go on a lending spree they could not afford. The prospect that these countries might not repay their loans in full has prompted investors to sell bonds en masse, lowering their price and forcing yields, or the rate of interest the asset pays, to rise. This in turn forces governments to fork out more money to creditors. When heavy selling pushed the yield on Irish 10-year bonds through 9% last week, it was a clear signal that the country faced a crisis. "When we buy, we are investors, and when we sell or don't buy we are 'speculators', according to the politicians — but we are the same people," said a hedge fund manager. "Ireland decided to rescue its banks by making the taxpayer finance the rescue, instead of letting shareholders and bondholders take the loss. This was a big mistake." The opinions of the so-called vigilantes were generally overlooked before the sovereign debt crisis that brought mayhem in financial markets in April and May. Left-leaning prime ministers such as Britain's Gordon Brown, Spain's José Luis Rodriguez Zapatero and George Papandreou of Greece said in March that they would not succumb to the markets. Instead, they would always prioritise the well-being and social policies of their countries. Asked at a progressive leaders' conference in London about their response to bond market pressures, Brown, Zapatero and Papandreou smiled and said they never thought they would talk about bond yields (borrowing costs) at a leftwing gathering. Events showed that they perhaps ought to have paid more attention to the vigilante argument. In May, Greece was forced to seek a bailout when its borrowing costs rose too high. At the same time, Britain's spiralling budget deficit and uncertainty over a hung parliament prompted reports that Britain would be the next target. The incoming Tory/Lib Dem coalition duly used the market bogeyman to shore up its case for rapid public spending cuts to restore the nation's "fiscal credibility". Gary Jenkins, head of fixed income (bonds and loans) at Evolution Securities, said: "The bond market provides liquidity to countries – they are not the enemy of governments, but the lenders. We are not dealing with evil speculators, but with pension funds." Bond investors, especially the larger ones such as Los Angeles-based Pimco, and BlackRock, the US firm that bought Barclays Global Investors, regularly meet the civil servants who manage national debts. They carry out roadshows in financial centres such as London and command attention —Pimco, for instance, manages about $1tn (£627bn) in assets, dwarfing Ireland's €157bn economy. The vigilantes are now arguably more powerful than governments — a lesson some politicians and officials had not learned until this year. For now, they have the upper hand, and they blame politicians for the situation. Jenkins says it was "ridiculous and irresponsible" not to have a plan in place when the sovereign debt crisis started to hit the markets this year. "Markets should talk to the European Central Bank, which much better understands how the bond market works, rather than politicians." Investors say they do not feel sorry for the countries under severe stress. But Bill Gross, founder of Pimco, told the Guardian in March that while as an investor he had to act rationally, as a citizen, he would vote for a progressive government, to make sure any stability measures minimised the impact on employment and social services. Bond investors now want more clarity about how much they could lose in any Irish restructuring plan. Whether EU officials will satisfy their demands still has to be seen. Despite everything that has happened this year, they don't seem to speak the same language. In the meantime, tax-payers are suffering.