Bond Vigilantes Attack: Will They Crash Risk Assets Again? | Ed Yardeni

**Ed Yardeni** (0:00)
Most people have come around to my view that maybe we're not going to have a recession. The AI revolution is the real deal. All this capital spending is a big boost for economic growth. These companies are basically saying, the managers are saying, boy, we wish we had all that capacity today because we have the demand today. This roaring 2020s idea is all based on the notion that the economy is fundamentally resilient. Consumers are fundamentally resilient.
Capital spending is strong.

**David Lin** (0:30)
We're right in the middle of earning season. We'll recap that. Tech stocks are rebounding from a big sell off the prior week. We'll talk about what's next for markets and what's next for bond yields. And who better to talk about bond vigilantes than the man himself who coined the term back in the 80s. Ed Yardeni joins us now. He is a founder and president of Yardeni Research. Welcome back to the show.
Dr. Ed, good to see you.

**Ed Yardeni** (0:53)
Thank you. My pleasure.

**David Lin** (0:55)
What were you referring to in the 1980s when you coined the term bond vigilantes? Let me play for you a clip of the last FOMC meeting that happened last week.
Chairman Warsh was asked a question about why he didn't raise rates last week. And I think he gave a pretty remarkable answer that speaks directly to your work. Take a listen and we'll react together.

**SPEAKER_3** (1:18)
So the Fed funds rate is now about 75 basis points below the two-year yield. It suggests markets think you'll have to tighten eventually about 100 basis points below most Taylor Rule estimates.
You're hitting your employment mandate, inflation stays high. Why should rates not be higher today?

**SPEAKER_4** (1:32)
Rates are higher today than they were 42 days ago.
Markets have made decisions because we step back in part from trying to influence those. Market judgments have moved up on what nominal rates are across the Treasury curve.
That doesn't mean we take them as by dictation, but we're observing them. So I think it's a mischaracterization to say that markets haven't reacted because we didn't move today. Markets are reacting in real time.
Monetary policy matters not just by what we say, or even what we do. Monetary policy matters by how it affects the real economy. And these prices that we see in financial markets is one of the many ways in which it affects the real economy.

**David Lin** (2:24)
Okay, who are the bond vigilantes and are they back?

**Ed Yardeni** (2:27)
Well, I think in some ways they're back. The bond yield has been around 4.6, 4.7%.
I think that's nothing to get particularly concerned about, but the entire yield curve is clearly pricing in a Fed rate hike, or at least, as the Fed Chairman said, the bond market seems to be doing what the Fed should be doing. And the only question is, will the Fed come around and listen to the message of the bond market? And I think in this case, a lot of the messages in the two year, just as the reporter from Axios pointed out, the two year is basically three quarters of a percentage point above the current Fed funds rates, about a 4.25% and the Fed funds rate is 75 basis points below that. In effect, the two years saying that the Fed should be reversing the three rate cuts that were provided at the end of last year, I didn't think they were necessary.
And I think that those rate cuts really just exacerbated the underlying inflation problem. Inflation is not 2%, it's closer to 3% by most components of the inflation rate. So yeah, I would say the bond market right now is sort of in suspense, trying to figure out whether warships are going to deliver a rate to hike in September or not. Meanwhile, the bond vigilantes are doing their thing in places like the UK and Japan, where bond yields have gone up a lot in protest of the lack of vigilance by the fiscal and monetary authorities. And so it's still an issue here. But we're not at a point where the bond vigilantes are really doing anything drastic to the economy.

**David Lin** (4:35)
Well, you coined the term back in the 80s. What exactly were you referring to? Were you talking about a group of people that ultimately want to change in fiscal policy?

**Ed Yardeni** (4:43)
No, it's not anybody you can identify. It's the bond market in a broad context. And the bond vigilantes are basically bond investors of all types, individuals, institutional investors who are trying to decide whether bond yields are where they look attractive.