In a note on Monday, the world’s biggest active bond fund manager referenced “bond vigilantes,” a term coined by Wall Street veteran Ed Yardeni in the 1980s, describing traders who protest massive deficits by selling off bonds to push yields higher. 

While there is no organized group of vigilantes coordinating market moves at a specific debt level, clues about the potential for vigilantism can be found in what the largest bond investors are doing, wrote chief investment officer of non-traditional strategies Marc Seidner and portfolio manager Pramol Dhawan.

“At PIMCO, we are already making incremental adjustments in response to rising U.S. deficits,” they added. “Specifically, we’re less inclined to lend to the U.S. government at the long end of the yield curve, favoring opportunities elsewhere.” 

The move represents a major escalation in financial markets over massive budget deficits and federal debt, which recently hit $36 trillion.

Investors had already exhibited tepid demand at some U.S. bond auctions while also sending Treasury yields higher, especially after Donald Trump won the presidential election as his plan for tax cuts was seen deepening deficits.

While Elon Musk has vowed to slash spending by $2 trillion through his Department of Government Efficiency, budget experts have said that’s not realistic without steep cuts to entitlements, which Trump has vowed not to do.

Debt held by the public, or the amount the U.S. owes to outside lenders after borrowing on financial markets, is already at about 100% of GDP, with that ratio soon expected to blow past the all-time record set in the immediate aftermath of World War II. But this time, it will take place without a global catastrophe while the economy remains robust.

At the same time, the cost of servicing all that debt has also exploded and is contributing to deficits as well, creating a feedback loop on the debt. Interest expenses for the debt are now $1 trillion a year and are among the biggest budget items, even exceeding defense spending.

Given the trajectory of U.S. debt, Pimco highlighted three alternatives that it favors:

• Instead of long-term bonds that are especially sensitive to Fed rates, it prefers short and intermediate maturities that provide investors with attractive yields without greater interest rate risk.
• Pimco is diversifying its interest rate exposures globally and pointed to British and Australian debt in particular, calling them high-quality issuers with stronger fiscal positions than the U.S.
• The bond giant also favors lending to higher-quality companies in public and private markets.

The Pimco note coincided with a steep climb in the benchmark 10-year Treasury yield this past week. Early Monday, it stood at about 4.14% but jumped to nearly 4.4% by Friday, fueled in part by a higher-than-expected producer price index reading on Thursday.

Despite a widely expected rate cut from the Fed this coming week, Wall Street has scaled back forecasts for future cuts as other policies from the incoming Trump administration are seen stoking more inflation.

“At the same time, we have become more hesitant to lend longer term given U.S. debt sustainability questions and potential inflation catalysts, such as tariffs and the effects of immigration restrictions on the labor force,” Pimco said. “The U.S. remains in a unique position because the dollar is the global reserve currency and Treasuries are the global reserve asset. But at some point, if you borrow too much, lenders may question your ability to pay it all back. It doesn’t take a vigilante to point that out.”