"Bond vigilantes" set their sights on Trump and Powell as the "anchor of global asset pricing" dances again
U.S. Treasury yields have surged in the past few weeks, putting pressure on the stock market. Analyst Ed Yardeni pointed out that the market has lost confidence in the fiscal and monetary policies of Trump and Powell. The yield on the 10-year U.S. Treasury has risen to 4.62%, up 102 basis points from the September low. After the Federal Reserve cut interest rates, yields increased due to stronger-than-expected economic data and rising expectations for Trump's 2024 election. Although yields had previously retreated due to the nomination of the Treasury Secretary, they have recently climbed back to a six-month high
According to the Zhitong Finance APP, U.S. Treasury yields have surged again in recent weeks, putting pressure on the U.S. stock market. Ed Yardeni, the most accurate analyst on Wall Street and economist and market strategist at Yardeni Research, stated that this is due to "bond vigilantes" worrying about "reckless" monetary and fiscal policies.
In a report released on December 28, Yardeni said, "Bond vigilantes are sending strong warnings. They do not believe that the incoming U.S. President-elect Donald Trump will maintain fiscal law and order better than his predecessor. They have also lost confidence in Jerome Powell, who is responsible for monetary law and order."
It is reported that 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.
U.S. Treasury Yields Rise by 100 Basis Points
As of December 27, the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," has soared to 4.62%, up 102 basis points from the 52-week low of 3.6% set on September 17. On September 18, local time, Federal Reserve Chairman Powell and other policymakers announced a 50 basis point rate cut, initiating a new round of rate cuts. The 2-year U.S. Treasury yield, which is more closely related to the Fed's interest rate outlook, jumped by about 75 basis points.
Following the Fed's significant rate cuts, U.S. Treasury yields rose due to stronger-than-expected economic data and increasing market expectations that Trump would win the 2024 election.
Driven by Trump's election and the Fed's second rate cut, U.S. Treasury yields rose significantly, reaching a short-term high of slightly above 4.5% on November 15. Yields subsequently fell after Trump nominated hedge fund manager Scott Bessen to serve as U.S. Treasury Secretary. Bessen called for policies to promote economic growth and to keep the deficit within 3% of GDP.
However, after dropping to a 52-week low of 4.13% on December 6, the 10-year U.S. Treasury yield surged again to its highest level in six months. This included a significant spike in yields on December 18, when the Fed cut rates for the third consecutive time, totaling a 100 basis point reduction. The surge in U.S. Treasury yields triggered a sell-off in the stock market, with the S&P 500 index falling nearly 3% and the Nasdaq Composite index dropping 3.6%.
Yardeni stated, "The Fed seems to be stimulating an economy that does not need stimulation."
As the stock market plummeted, the 10-year U.S. Treasury yield fell by 7 basis points on Monday to 4.55%, continuing the downward trend from last Friday.
Questioning Trump's Policies
Meanwhile, doubts are resurfacing about whether Trump's administration can control the deficit or inflation.
Elon Musk and Vivek Ramaswamy, co-leaders of Trump's newly established Department of Government Efficiency, called for a $2 billion cut in government spending but did not specify a timeline or concrete measures.
Yardeni stated, "Bond vigilantes do not believe that Trump 2.0 policies will reduce the federal deficit; they are skeptical that some of these policies may lead to inflation, such as Trump's plans to raise tariffs, deport illegal immigrants, and cut taxes." Powell and his colleagues share the same concerns. Powell pointed out that the "policy uncertainty" related to Trump's policies is one of the reasons for the slow pace of further interest rate cuts.
The "dot plot," which reflects the Federal Reserve policymakers' forecasts for the federal funds rate, shows that the rate cut next year will only be 50 basis points. The market expects only a 25 basis point cut in 2025, and that it will not occur until May or June.
Theoretically, a Federal Reserve rate cut provides new monetary stimulus or at least eliminates some monetary tightening policies. However, in reality, rising U.S. Treasury yields are pushing up mortgage rates and other borrowing costs, which will have an adverse impact on the economy.
The U.S. Stock Market Bull Run is Expected to Continue
Rising U.S. Treasury yields may also shift the Trump administration's focus to deficit control.
Yardeni stated, "We often say that we will start to worry when bond investors begin to worry about the federal deficit. That seems to be happening."
Yardeni still believes that by 2025, the yield on the 10-year U.S. Treasury will be around 4.5%, fluctuating by 25 basis points, but it could also reach a long-term peak of 5%.
Yardeni has long been optimistic about the U.S. economy and stock market, and he "has not turned bearish on the stock market." After a "pullback/correction," he expects the bull market to continue and believes that Trump 2.0 will make some progress on the deficit outlook