The bond vigilantes were a massive and towering figure in the early 1990s, shortly after the term was coined by Ed Yardini, a particularly successful financier who remains a prominent blogger. Yardini remains very much a bond vigilante, at least in spirit if not in market activity, arguing that inflation and market implosions remain significant risks to both bond markets and global growth.

The argument is odd for several reasons, the most important being that inflation remains very weak. The CPI in the U.S. has risen 1.5% year-over-year, and its 1-year changes have remained below the 2% target for a very, very long time. Even when America was increasing its monetary supply, inflation refused to increase to any alarming amount, even when trillions of dollars were being pumped into the money supply.

This caused a lot of bond vigilantes and pundits who worry about bond vigilantes to take stock of their preconceived notions of how sovereign debt and, more fundamentally, money itself function. It has resulted in the emergence of a new obsession with what can be best considered a trendy heterodox economic theory known as Modern Monetary Theory (MMT). As MMT isn’t orthodox or, for that matter, actionable from an investor’s standpoint, it is a worthwhile concept to understand as a way to see how post-Keynesian economists are changing their viewpoints on how central banks and bond markets work. A good primer on the topic can be found here, with an in-depth explanation of the theory’s biggest strengths and weaknesses from the point of view of contemporary economic thought.

MMT should not be considered an alternative to Keynesian or libertarian economics, but as an independent school that has theories from both camps, as the linked primer explains. What is crucial for our purposes, though, is how post-2009 (and considering the experience of Japan) forces us to consider the MMT theory on bond markets more seriously.

In short, MMT states that bond vigilantes have limited power when a fiat currency is free floating. What this means is that the supply of bonds issued and the demand for those bonds do not dictate their prices (and thus interest rates) as other fundamental factors. The reasons why the laws of supply and demand break down with sovereign debt has to do with complex theories of money, but the main point for our interests is that one cannot predict interest rates with the assumption that a massive expansion of bonds will result in vigilantes lowering the bid on those bonds, thus lowering their price and increasing their yield. The increase in Treasury bonds post-2009, and those bonds’ relative low yields, has demonstrated the soundness of this view of MMT (even if other perspectives of the theory are possibly or likely false).

To return to Yardini. In the early 1990s, bond yields soared in a short period of time due to a fear of excessive Federal spending, and that became the context for fears that QE would result in vigilantes returning to punish bond issuers in the late 2000s, both in America and in Europe (where yields have remained near zero, implying that prices have not been driven down by the vigilantes). Since those fears were wrong, the theory needs to be addressed.

For Yardeni, he defended his theory during the 2010s Eurozone sovereign debt crisis by arguing that Central Banks’s actions have negated bond vigilante activity; however, since they were able to without causing inflation to rise significantly, it begs the question of whether the concept of a bond vigilante in a country with a free-floating currency is really a valuable concept at all. From this perspective, Yardeni’s defense can be seen more as a capitulation to the MMT view than anything else.

Which leads us to markets today. If bond vigilantes cannot control bond prices due to Central Bank activity, can we use supply/demand models on bond markets for price discovery, in turn developing models to recommend investment advice? The answer is clearly not. Obviously bond markets are much messier, with more factors than supply and demand as their driving forces. This means that, by necessity, a new model for understanding how bond price discovery is done must be created.

As a result, bond markets have gotten much more complex, much more sophisticated, and much less predictable in the post-QE era. That is both a challenge and an opportunity for investors who choose to try to understand this intricate market.