"Bond vigilantes" are targeting Trump, and the "anchor of global asset pricing" is dancing again

Trump achieved a resounding victory in the U.S. presidential election, triggering a wave of buy signals in the U.S. stock market. Traders are optimistic that a second Trump administration will be beneficial for business and stimulate an already strong economy, leading to a shift of assets into U.S. stocks and dollars, causing dollar assets to soar. However, there is a notable exception: investors in the $28 trillion U.S. Treasury market are selling bonds, pushing yields to their highest levels in months.

The sell-off serves as a reminder from a powerful group: the so-called "bond vigilantes" are monitoring Trump, who calls himself the "king of debt," as he claims to have "unprecedented" power to implement tax cuts and tariff agendas.

The rise in U.S. Treasury yields indicates that financial markets believe Trump's policies may trigger inflation and increase federal debt. Higher borrowing costs could, in turn, impact Trump's economy, slowing down economic growth and other markets.

Senior strategist Ed Yardeni stated, "This is a new day for America and a new day for the bond market. The fact that Trump has garnered so much support gives him tremendous power not only in the U.S. but globally. Given the already large deficit, the bond market has reason to be concerned about continued stimulative fiscal policy."

Yardeni coined the term "bond vigilantes" in the early 1980s to describe investors who attempt to influence government policy by selling bonds or merely threatening to sell bonds.

The yield on the 10-year U.S. Treasury surged nearly 25 basis points on Wednesday, reaching 4.48%, the highest level since July. The 10-year U.S. Treasury yield serves as the risk-free benchmark for over $50 trillion of fixed-income securities denominated in dollars globally. Investors like Yardeni believe that if Trump's fiscal policies provoke investor outrage, that yield could touch 5% again.

The original "bond vigilantes" emerged in the 1980s when the U.S. was experiencing a prolonged period of abnormally high inflation. Since then, they have appeared intermittently, including during the first term of former President Bill Clinton, when he attempted to push through an ambitious domestic agenda.

Fast forward to today, even without considering the impact of leadership changes, the nonpartisan Congressional Budget Office predicted in June that by the end of 2034, the long-term deficit would increase the debt to about $48 trillion Currently, the net interest payment cost is equivalent to 3.06% of GDP, the highest level since 1996.

Last month, the Congressional Budget Office (CBO) estimated that due to Trump's deficit-increasing plan, debt will increase by $7.75 trillion by fiscal year 2035, reaching the currently projected debt level. Although the CBO pointed out that the scale could range from $1.65 trillion to $15.55 trillion, the likelihood of a Republican sweep in Congress is increasing—Republicans have already secured a majority in the Senate, and they are also leading in the House of Representatives by a narrow margin—raising the possibility that Trump's plan will not be blocked by politicians.

Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, stated, "Given the scale of the deficit and the size of U.S. debt, fiscal policy is becoming more important for us investors."

Before the vote on Tuesday, U.S. Treasury yields and inflation expectations were already rising. The 10-year breakeven rate (a market indicator measuring long-term inflation trends) surged to a high of 2.43%, the highest level since April of this year. Since September, this indicator has been rising as the economy showed resilience following the Federal Reserve's 50 basis point rate cut that month, and the prospects of Trump's victory increased in the betting markets.

As Trump's policy agenda is viewed as inflationary, some economists have anticipated that after the Federal Reserve cuts rates by 25 basis points on Thursday, subsequent cuts will be lower than previously predicted. This could also put pressure on the bond market.

There is also evidence that investors are demanding higher yields in exchange for the risks of holding longer-term debt. The so-called term premium has been climbing. The term premium is a component of yields that compensates investors for purchasing long-term bonds instead of rolling over short-term securities, seen as protection against unforeseen risks such as inflation and debt supply-demand shocks. As of November 4, the New York Fed's 10-year term premium model jumped from negative 29 basis points in September to about 22 basis points.

Robert Dishner, Senior Portfolio Manager at Neuberger Berman, stated, "The U.S. government needs to be cautious; if they do not budget carefully, investors may demand higher compensation."

Trump stated that the key to addressing the fiscal outlook is further tax cuts, which he believes will stimulate economic growth, thereby increasing revenue to offset the impact on government surpluses. Most economists disagree with this view and believe that under his leadership, U.S. debt will exceed 100% of GDP.

The facts may also prove that Trump's plan will not trigger inflation as some fear. Faced with turmoil in the bond market, he may even cut spending in certain areas. Any measures that push long-term yields up to 5% could attract some investors. **

However, as long as U.S. debt and deficits remain high, they will become pressure points. Gregory Faranello, head of U.S. interest rate trading and strategy at AmeriVet Securities, stated, "Deficit spending is certainly not going to disappear. This will be a consistent theme, although that does not mean yields won't eventually reach levels that spark buying interest—it's just hard to say exactly what those levels will be."