Nostalgia for the 1980s seems to be everywhere at the moment.

The biggest film is a re-boot of Top Gun. Stranger Things, set in the 80s, is the most watched TV show. Kate Bush is topping the download charts. The UK has a Prime Minister who invokes Mrs Thatcher, whilst inflation has surged to levels last seen in 1981 and the pound briefly crashed to its 1985 lows.

Back then, the most powerful force in finance was the bond market, as captured in Tom Wolfe’s book ‘The Bonfire of the Vanities’. This led to the rise of mysterious traders known as The Bond Vigilantes. These vigilantes would sell or avoid the bonds of certain issuers, resulting in a jump in the interest rate to be paid – this could be a government which was seen as being soft on inflation, or a company pursuing a seemingly reckless course of action such as a big takeover. The rise in interest rates resulted in extra costs to the issuer and was often enough to force them to change course. In the 1980s, the large bond traders in the US Treasuries market used their powers to push up interest rates and curb inflationary pressures. Across the following decades, these self-styled ‘masters of the universe’ were able to use their financial firepower to make companies and indeed entire countries bend to their will.

More recently, we have had what feels like a rolling series of crises, from the collapse of the banks in 2008 to the pandemic in 2020, and each time global central banks have used policies such as interest rate cuts and Quantitative Easing to keep the cost of borrowing at rock bottom levels and thus keep economies turning. Forces such as globalisation and the internet have helped to keep inflation low, by moving industrial production to the lowest cost regions and improving productivity. In an era of plentiful, cheap money, the vigilantes simply faded away.

But now they are back. The huge fiscal and monetary stimulus (government spending and interest rates cuts) created in response to the pandemic, when combined with disruptions to supply chains and Russia’s war in Ukraine, has seen inflation rise sharply this year, and the bond market is in a mood to punish those who are seen to step out of line and issue large amounts of debt.

This is the backdrop to the markets recently punishing what they perceive as unsustainable policies by the UK Government. Whilst the Bank of England is raising rates to dampen inflation, the government is seeking to stimulate growth through more borrowing, and the markets have decided to punish them for it in the form of an increase in the cost of that borrowing – essentially demanding compensation for the large amounts of debt being issued and the extra risks this entails. Furthermore, perceptions of tension between the major players – the government, the Bank of England, the Office of Budget Responsibility – undermines credibility and pushes up long-term borrowing costs further, affecting us all.

There are signs that the government is reacting to this, and policy has been changed; the reversal of the planned cut to the top tax rate, signs of a rapprochement with the OBR, and the Bank of England interventions in gilt markets have all helped to sooth the vigilantes for now. Yields have dropped and the pound has risen.

Can the government and other institutions find a way to calm inflation whilst stimulating demand, thus keeping markets calm and reassured? We hope so and think there is a path through to a far better 2023, but to quote another 80s icon, we need to be lucky, lucky, lucky.