Yardeni, Economist Who Cried ‘Bond Vigilantes,’ Spots Them Again

(Bloomberg) — Edward Yardeni, the economist who coined the term “bond vigilantes” during the 1980s and has regularly predicted their return to the investment landscape ever since, said they’re “saddling up.”

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The president and chief investment strategist of Yardeni Research Inc. began using the term as a Wall Street economist in 1983 to describe investors bent on forcing the government to get its fiscal house in order by dumping bonds to push market interest rates higher. For most of the intervening period, long-term Treasury yields have been in a downtrend that reached its nadir in early 2020.

Yardeni at various points — often in connection with periods of fiscal expansion — has anticipated the return of the bond vigilantes and been stood up. This time may be different. Long-dated Treasury yields are on the march, with the 30-year bond’s reaching its highest level since 2011 on Thursday, spurred by a combination of economic resilience despite Federal Reserve interest-rate hikes totaling more than five percentage points over the past year and expanded US government borrowing.

“Usually supply and demand don’t really matter that much because federal deficits tend to widen during recessions when the Fed is lowering interest rates,” Yardeni said in an interview on Bloomberg Television’s Surveillance. “This time we have federal deficits widening when the economy is doing well. I think the bond vigilantes are quite concerned about that. There’s way too much supply.”

The US 30-year yield briefly fell below 1% in March 2020 when the onset of the pandemic unleashed a global flight to safe, liquid assets. This week it topped 4.42%.

For most of the past two years, Treasury yields were led higher by short-dated tenors in anticipation of Fed interest-rate increases. Over the past month, though, long-maturity yields have taken the baton. That’s partly because the US labor market has refused to buckle, keeping upward pressure on inflation. Also, the supply of Treasury securities — which topped $25 trillion last month — is projected to increase by about $2.9 trillion this year and $2.4 trillion next year.

Rising yields have wiped out the Treasury market’s gains for the year. The bond vigilantes are “certainly saddling up” and could do damage in the stock market as well, Yardeni said.

The S&P 500 Index, down around 5% from its year-to-date high reached in late July, has scope “to either move sideways or continue with this pullback, maybe even down to the 200-day moving average,” he said. “I have concerns about what the bond vigilantes are going to do.”

–With assistance from Jonathan Ferro and Lisa Abramowicz.