Abstract
Traders of treasury bonds closely monitor national politics, as the value of government bonds is highly sensitive to factors such as policy decisions, sovereign default risk, and political instability. Governments, in turn, pay close attention to bond market movements, since large sell-offs drive up yields and increase the cost of servicing public debt. While extensive research has explored how bondholders respond to government actions, there is limited empirical evidence that governments systematically react to pressures from bond markets. This paper presents the first causal evidence of the influence of "bond vigilantes" on government behavior. It examines shifts in cohesion within the governing coalition as a political response to changes in yields, finding that increased bond pressure leads to greater coalition unity. Drawing on data from Italy’s XVIII legislature (2018–2022), the study introduces a novel, high-frequency measure of government cohesion based on textual analysis of parliamentary speeches by coalition members. To identify exogenous variation in bond pressure, the paper employs an instrumental variable strategy that leverages movements in foreign bond markets with correlated trends. The findings are robust across specifications and are confirmed using an alternative cohesion measure derived from roll-call votes. Importantly, the analysis finds no correlation between government cohesion and stock market fluctuations, suggesting that the influence of "vigilantes" is specific to bond markets.