Bond vigilantes could make a comeback, says Ed Yardeni

Wall Street veteran Ed Yardeni says the approaching US election could augur the return of the market’s bond vigilantes as the Treasury Department readies new debt issuance plans. 

It’s a call the founder of Yardeni Research Inc., who famously coined the phrase in the 1980s to describe investors selling bonds to set the US government back on a course of fiscal restraint, has made before. 

“It’s a conceivable scenario that the bond vigilantes are definitely mounting up,” Yardeni told Bloomberg Television on Monday. “There’s no discussion by either candidate about doing anything to reduce the deficit to deal with the debt, to deal with the exploring net interest expense of the government.” 

In August 2023, he heralded their return once again, by October longer-date Treasury yields had reached multi-year highs. But then, almost as quickly as they rose, yields plunged — with the 10-year all the way back down to near 4%. The benchmark Treasury rate is higher so far in 2024, although below those recent peaks.

Yardeni’s comments come ahead of a slate of debt issuance in the coming weeks in both the US and UK that will leave markets to digest the new supply.

On Wednesday, the Treasury will release its so-called quarterly refunding statement, an outline of borrowing plans for the three months ahead. Since May, the department has said it expects to keep note and bond auction sizes at the same size “for at least the next several quarters” — with some auction sizes already at a record level. Wall Street dealers expect the refunding auctions will total $125 billion for the third quarter in a row.

UK investors are also preparing for a rise in borrowing associated with the release of the government’s budget. The Debt Management Office on Wednesday is seen announcing an increase of £15 billion ($19.5 billion) in gilt issuance, according to dealer estimates. 

More broadly, traders are focused on the economic plans of Vice President Kamala Harris and Former President Donald Trump as the US election campaign reaches its final days. The yield on benchmark 10-year Treasuries has risen by nearly 50 basis points in October, likely driven by election-related trading as well as a repricing in dovish expectations of Federal Reserve interest-rate cuts amid robust economic reports. 

Still, other assets, including the US dollar and equities, have proven resilient. 

“The reality is that the dollar has actually strengthened at the same time the bond yield has gone up,” Yardeni said. “I wouldn’t get too excited about the bond yield going up to 5% but it’s certainly looking more realistic than it was a few weeks ago.”