Yardeni Research Founder & President Ed Yardeni Talks Bond Yields

SPEAKER_1 (0:02)

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Ed Yardeni (0:07)

Ed Yardeni of Yardeni Research writing, given where the 10-year yield stands relative to nominal GDP growth, the current selloff can't be dubbed the revenge of the bond vigilantes.

SPEAKER_1 (0:16)

Not just yet. Join us now for more.

SPEAKER_3 (0:18)

And welcome, how would you describe the selloff then with yields at multi-decade highs?

Ed Yardeni (0:23)

Well, I think when you look around the globe, there are different explanations for what's going on. If you're looking for one explanation for the increase in bond yields around the world, we discussed this last time, it's probably the unwind of the yen carry trade. As the Bank of Japan has been raising interest rates, all those hedge funds and speculators that borrowed money in Japan at near zero rates are now unwinding their positions. They bought a lot of government bonds, I think.

That explains the global rate increase. Here in the United States, I would say a more important explanation for what's going on is that we've seen an economy that's really on fire, it's booming.

Consumer spending is hanging in there really, really well. The baby boomers are retiring and still spending money.

Capital spending is absolutely booming, as you said, the AI hyperscalers and others just keep borrowing more and more. Then of course, the deficit is extremely large. So I think the happy spin, if there is one for this backup and bond yields in the US, I think it's to a large extent reflecting the strength of the economy, and that's why tips, the real rate has actually been leading the increase in the nominal deal rather than inflation.

SPEAKER_1 (1:48)

Can you put a positive spin on what's happening in elsewhere, in places like France said?

Ed Yardeni (1:53)

No, I don't think you can really put a positive spin on France. I mean, France is starting to look like a Greek debt crisis. The Greeks had that debt crisis back in 2010 And Bondage Landy has pushed the bond yield all the way up to 40%.

And that got the attention of the politicians finally. And as a result, the bond yield now in Greece is below the bond yield in France.

SPEAKER_4 (2:27)

So Ed, do you think that they're hitting the danger zone? The idea where suddenly you do enter this doom loop or higher yields, but get higher yields without some sort of fiscal solution.

Ed Yardeni (2:36)

Well, we're certainly heading into the direction of the danger zone.

I've kind of called it a spectrum of bond yield scenarios. And the good end of the spectrum is better than expected economic growth, leading to an increase in the neutral interest rates. Remember, at the beginning of the year, Fed officials were saying that the Fed funds rate was still slightly restrictive. Now, the new Fed chair, Warsh, as most recently said, that the 25 basis point increase in September in the Fed funds rate was eliminating or removing a dose of accommodation. So now, all of a sudden, Fed officials are saying that the real rate is higher. And I think that has to do with stronger economic activity. But look, the other factor, of course, is oil prices. They are up a lot today. And the bond yields, the French bond yields almost at 5 percent, 4.9 percent as last night I saw.

And meanwhile, the US bond deal is kind of relentlessly moving towards 5.5 percent. And then we'll be starting to talk about, well, where do we settle this thing between 5.5 and 6?

SPEAKER_4 (3:51)

And you make a lot of great points. One of them is that the bond vigilantes haven't really come out with pitchforks yet about the US deficit. They are responding more to the strength in the US economy, the borrowing bench that we're seeing from AI, as well as higher oil prices.

That could be looked at positively and negatively. The negative side is when they start to care, and if there is an additional round of bombing ahead of the midterms, after the midterms, if there is ongoing costs tied to the war, in addition to any kind of compromise to expand the deficit, how high could they go if the bond vigilantes actually start to take a look at the deficit?

Ed Yardeni (4:28)

Well, if they started to really focus on the deficit, they could go higher relative to nominal GDP. One way to kind of try to assess the impact of the bond market on the economy is to look at the bond yield, the 10-year bond yield, which is almost 5.5% relative to nominal GDP growth on a year-over-year basis, and that's running about 6, 6.5%.