It seems like they did manage to put up that famous leave sign before delegating to market timers the guessing game of the anticipated rate hikes.
Vigilantes are the foot soldiers of the interest rate formation process. They are feared because they vote with their feet on the credibility of monetary policies. By flagging the danger of rising inflationary expectations, they are warning people to review their economic behavior and their portfolio preferences.
So, what does the "gone fishing" sign tell us? It's just a simple message to let us know that these keen observers of the U.S. dollar's real purchasing power are perfectly happy with the current policies of the Federal Reserve (Fed).
Here is an example to explain the technicalities of this rare bliss.
A long-term interest rate (or a bond yield) consists of two parts: a real interest rate plus inflation expectations. A real interest rate is roughly approximated by the potential growth rate of the economy, while inflation expectations set the price investors will demand for holding long-term fixed-income assets.
Quiescent inflation expectations
To illustrate this, consider a 1.93 percent yield investors were asking last Friday to hold the Treasury's ten-year note. If you accept the consensus view that the potential growth rate of the U.S. economy is now somewhere in the range of 1.5-2.0 percent, you will inevitably conclude that inflation expectations are virtually zero. In other words, bond market investors are willing to hold Uncle Sam's ten-year paper with little, if any, inflation premium.
That explains why bond market vigilantes have "gone fishing" -- despite the four-fold increase of the Fed's monetary base over the last six years, and an inflation dynamite of $2.6 trillion in excess reserves (funds banks can readily lend) the U.S. banking system was holding as of March 18, 2015.
Is it time, then, for vigilantes to go back to the watchtower?
It depends where the watchtower is. If you are observing the situation from a purely U.S. point of view, you might suspect that a zero inflation premium on a ten-year loan to the government is probably an imprudent investment.
Here are a few reasons that could underlie such a concern.