"Bond Guardian" returns! No matter who wins, will U.S. Treasury yields hit 5%?

On the eve of the results of two key events—the U.S. election and the Federal Reserve meeting—the "bond vigilantes" seem to have taken control of the market, aiming to push the 10-year U.S. Treasury yield up to 5%, forcing the Federal Reserve to reconsider the necessity of future interest rate cuts.

"Bond vigilantes"—a term first coined by Wall Street veteran analyst Ed Yardeni in the 1980s—refers to investors who successfully force governments and central banks to change policies by driving down bond prices and raising bond yields.

According to FactSet, the 10-year U.S. Treasury yield has risen by 50 basis points since October. Even after a pullback this past Monday, the yield remains high at 4.309%, above the 50-day and 200-day moving averages.

In a report on Monday, Ed Yardeni warned that "bond vigilantes" are dominating the market and may push the 10-year U.S. Treasury yield up to 5%, thereby influencing the Federal Reserve's future interest rate actions.

Yardeni noted that considering the year-on-year decline in the September inflation rate and the weaker-than-expected job growth and manufacturing activity in October, the bond market seems to be ignoring the "factors that typically prevent yields from rising":

Investors appear to be more focused on stimulus measures—fiscal and monetary policies—that are likely to be implemented in an economy that does not need them.

This could affect the Federal Reserve's interest rate cut plans. Yardeni stated that although the Federal Reserve decided in September to ease monetary policy by lowering the benchmark interest rate, the bond market has recently "tightened the economy itself" through the rise in U.S. Treasury yields:

The bond market can easily offset the impact of another rate cut.

This is because the bond market believes that the Federal Reserve's rate cuts are too large and too early, thus raising long-term inflation expectations.

Yardeni believes that with the U.S. economy continuing to expand and the S&P 500 hovering at historical highs, further rate cuts by the Federal Reserve are "unnecessary":

Any further rate cuts would increase the likelihood of a market crash similar to that of the 1990s.

The results of the U.S. election could further exacerbate this situation. Yardeni believes that concerns about the next government potentially implementing more fiscal measures have intensified these expectations.

Currently, neither Trump nor Harris has clearly stated how they will address the massive U.S. debt. Given that Trump's economic policies center around broad tax cuts and tariffs, investors believe that if Trump is re-elected, the risks of rising deficits and inflation will be greater.

State Street Bank macro strategist Noel Dixon warned that a key consideration for Trump's victory is whether the Republican Party can control both the House of Representatives and the Senate, which would enable him to implement many fiscal agendas:

This is uncharted territory. In this case, the 10-year U.S. Treasury yield may rise from 4.3% to over 5%.