In the last decade, observers have lamented the disappearance of the Vigilantes, as budget deficits exploded in both the Bush and Obama Administrations, yet interest rates kept falling (not rising). With interest rates on U.S. Treasury 10-year notes at only 1.6%, the vigilantes have not returned to the U.S.
But they have returned to Europe, as despite a 100 billion Euro bailout for Spanish banks, yields on Spanish government notes today rose to 7.15%, a dangerous level that preceded collapses in Ireland and Greece. When confidence goes, whether in a bank or a government, it is hard to keep the situation from spinning out of control.
When the Vigilantes act in unison, their momentum is difficult to reverse. It will probably require coordinated central bank intervention, along with significant European policy coordination, can stanch the unraveling and lead to higher asset prices.