Suburban moms, crypto bros, and Swifties aren’t the only voters making their presence felt this election season. Bond investors are voting with dollars in financial markets, and they don’t like the sight of it.
The term “bond vigilantes” was famously coined by Wall Street veteran Ed Yardeni in the 1980s to refer to traders who protested huge deficits by selling off bonds to push up yields. Ta.
Mr. Yardeni, president of Yardeni Research, and Eric Wallerstein, the firm’s chief market strategist, wrote in a note released Wednesday that vigilantes are conducting early voting, with the 10-year Treasury yield rising to 19. Since then, it has increased by 63 basis points to 4.25%. The Federal Reserve announced a 0.5 point rate cut at its meeting last month.
“Exit polls show that bond vigilantes believe that Fed Chairman Powell’s dovish monetary policy has increased as the economy is overheating and the Fed’s premature 50 basis point rate cut on September 18th increases the risk of the economy overheating. “I am voting against it,” he said.
U.S. Treasury yields fell ahead of the first rate cut as investors looked for an aggressive easing cycle to match an aggressive tightening cycle. But since the Fed meeting, the Fed has staged a major reversal.
Sentiment has shifted significantly, with some Wall Street forecasters warning that the central bank may even pause further rate cuts. That’s because Fed officials and economic data are dampening optimism for significant easing.
In their note, Yardeni and Wallerstein also noted that recent market movements were driven by the outlook for the federal budget deficit, which has ballooned in recent days and is due in large part to rising interest rates in the fiscal year ending Sept. 30. In the fiscal year, it reached $950 billion, an increase of 35% from the previous year.
“Bond vigilantes also vote against Washington, believing that no matter which party wins the White House and Congress, fiscal policy will further expand the already ballooning federal deficit and accelerate inflation. “There is a possibility that they are investing in it,” they explained. “The next administration will face more than $1 trillion in net interest spending on the growing federal debt.”
Budget watchdogs are warning of an exploding federal deficit. The budget would expand under either Donald Trump or Kamala Harris, but the Penn Wharton Budget Model and the Committee for a Responsible Federal Budget say Trump’s policies would create even bigger holes.
That’s because the former president has suggested various tax cuts and even the complete abolition of the income tax. Meanwhile, his pledge to raise tariffs across the board is widely seen as inflationary, as companies typically pass on additional costs to consumers in the form of higher prices.
As Trump gains support in polls, his policies expected to stimulate inflation and widen budget deficits are increasingly priced into bond markets, with a flood of new U.S. Treasuries pushing investors to demand higher interest rates. This is expected to further increase upward pressure on Fed interest rates and yields. i will be back.
Mr. Yardeni and Mr. Wallerstein said that in addition to the sharp rise in U.S. Treasury yields, other financial markets, including a rise in federal funds futures, a rising outlook for inflation through the 10-year TIPS rate, a strong dollar, and gold up 33% year-to-date, He emphasized the trends in .
Gold has emerged as an attractive hedge against rising inflation, profligate fiscal policy, and geopolitical instability.
“Investors are hoarding precious metals to protect their portfolios from all of the risks listed above,” they write. “Foreign central banks in the axis of evil are building up gold reserves to avoid future financial sanctions.”
Bond vigilantes seemed dormant for years, especially as the Fed kept interest rates low, but Yardeni said last year that they were back and “piling up” again with the federal deficit on the agenda. “There is,” he said.
Despite Wall Street heavyweights like JPMorgan CEO Jamie Dimon sounding the alarm about the U.S. deficit and debt, both Trump and Harris have made it a priority in their campaigns. It is not a matter of concern. That could give bond vigilantes a bigger voice on the issue.
The power of debt vigilantes was recognized in the early 1990s, when U.S. yields plummeted as investors dumped Treasuries amid concerns about the federal deficit in what became known as the Debt Massacre. Well shown by the sharp rise.
James Carville, an advisor to President Bill Clinton at the time, tweeted that he wanted to be reborn as a bond market. “You can blackmail anyone.”
