There’s no reason to panic on the US bond market just yet, even as investors are showing growing signs of unease over rising government debt, according to Yardeni Research.
The firm said the market is becoming more concerned about the surge in borrowing by hyperscalers, while questioning whether the Federal Reserve will remain sufficiently vigilant on inflation if oil prices climb again.
“We aren’t pushing the panic button,” strategists led by Ed Yardeni wrote in a note Tuesday. “However, we are closely monitoring whether the bond vigilantes might do so.”
Yardeni pointed to the summer of 2023, when US yields surged from 4% to 5% in just a few months. That level ultimately proved attractive to buyers, and the firm says there may be a similar buying opportunity ahead.
“We are sticking with our view that the US bond yield should continue to trade in a normal range of 4%-5%, without causing any adverse consequences for the economy and corporate earnings,” the strategists wrote. “Nevertheless, now that the yield is approaching the top of this range, we are monitoring the activities of the bond vigilantes more closely.”
US 10-year yields are now at 4.73%, near their highest in more than a year on concerns over heavy government spending and inflation. Higher oil prices from a prolonged Iran war could add to price pressures and bolster the case for Fed rate hikes. Meanwhile, the AI boom has driven a surge in corporate borrowing, leaving Washington and Silicon Valley competing for the same pool of capital.
Higher US interest rates also draw global capital toward the dollar, complicating Japan’s efforts to prevent the yen from weakening beyond 160 per dollar and China’s attempts to hold the yuan steady. Because Treasuries are the benchmark for pricing debt worldwide, rising US rates ripple into sovereign, corporate and mortgage borrowing costs everywhere, Yardeni said.
Ed Yardeni, president and chief investment strategist, coined the term “bond vigilantes” in the 1980s to describe investors who sell bonds in protest against government policies they deem inflationary. This drives bond prices down and yields up, forcing authorities back on a course of fiscal restraint.
The firm said bond vigilantes have been stirring around the world in recent months, suggesting concerns over government debt extend beyond the US. They’ve been especially active in the UK and Japan, where debt burdens are especially high relative to the size of their economies, the strategists said.
This article was provided by Bloomberg News.