Yardeni Sees Revenge of the Bond Vigilantes

Ed joins us now for more. Ed, welcome to the program, sir. It's good to see you. Do you believe we might be entering a little bit of a negative feedback loop in this bond market where high yields fuel deficit worries and that fuels high yields? Are we on the brink of that, Ed? I think we're on the brink of it. We're sort of in the midst of it. We we've actually seen, I think, since the beginning of the year, a synchronized increase in bond yields. So it might actually have started last year. And I think a lot of that has to do with what we've previously discussed. The Bank of Japan is raising interest rates, and that is causing an unwind of the global carry trade, which I think is affecting globe global bonds. And so a lot of that is kind of a a knee jerk mechanical event. But at the same time, I think we also have these algorithms that'll take any news whatsoever that's out there, and some of that's been bearish, and kinda blow it up, so we get these rapid increases in bond yields. And at what point do you think it becomes self limiting that the buy steps in because people start to worry about the damage? I think there's already a lot of worry about the damage. People are already kinda wondering what's what's gonna break here. So I think we're already at that point. I I I think the best way to monitor that is to just keep watching where the bond yield is is relative to short term rates. Usually, you start to get bond yields going up less than short term rates when bond investors become increasingly convinced that if short term rates continue to go up, that something will break. And, of course, the two year treasury here and around the world has been a very good leading indicator of what central banks are gonna be doing. And right now, the two year treasuries in all the major countries in the world are pointing towards more tightening by by central banks. So on September 15, I've kind of concluded that we wanna proceed with caution here when it comes to the equity market. Well, it turned out to be actually a good call, more of a good call for the bond market, though I was focusing on the equity market. So, Ed, you said, it's a good time to proceed with caution. This morning, we were just talking. John mentioned that O'Dora has postponed its IPO due to what it called uncertainty in the market even as it reports a 90%, revenue growth over the year of 2026. Right. Is this potentially the sign of something breaking when it comes to the pipeline of deals that are trying to get done? Well, I I kind of am watching Oracle more closely because of the Stargate deal where Oracle is in a partnership with OpenAI and SoftBank to build data centers, and I think the total commitment is $500,000,000,000. And just recently, one of those data centers was postponed rather significantly because a 19 mile gas pipeline in New Mexico was rejected by the state. So, yeah, there there's there's starting to be some stresses in the AI trade as well. And, of course, that's what has continued to hold the market up quite well near a record high for both the Nasdaq and the S and P five hundred. Does this mean that at at this point, if something might break or there are signs that at least the broader risk appetite is waning or at a pretty accelerating clip, Does that make you bullish bonds? We heard from Jim Bianco yesterday that he is getting bullish for the first time in years just based on this technical retracement. I I would say that bonds yielding 5.25% are very attractive, you know, certainly on a ten year basis. The the the good thing about bonds is if you just hold them, you'll get you get your money back and you get the yield. And I think, again, five and a quarter is a pretty pretty good yield, but it doesn't feel like this is necessarily the peak in bond yield. I think even Bianco said that we we might find that we can get even better yields if we just kinda kinda wait here. So I'm not convinced that five and a quarter percent is necessarily the top in yields. I was thinking that that that was the case, but I think but I'm I'm increasingly wondering whether the unwind of the yield curve trade is a big problem here. This kind of I just recently wrote, actually, last night that this might be the revenge of the bond vigilantes. The bond vigilantes were suppressed from the great financial crisis to the great virus crisis with quantitative easing and zero interest rates. And now that they've been sort of liberated and free to express an opinion, they're saying, well, you know, you accumulated all that debt at near zero interest rates back then. Now you're gonna have to refinance it at these yields, and that's that's concerning. I looked at it this morning. You called it invasion of the bond vigilante algorithm. So how high, Ed, do you think yields can actually go? Well, I I know. I think more and more people are thinking about the possibility of getting closer to 6%. I I would say five and a half percent. I'm not I'm I'm not getting into the alarm stage here. I I think we are gonna find lots of buyers at at these kind of kind of levels. The same thing happened in 2023 when the bond yield got to 5% very quickly. We saw that the auctions actually started to go very well. And then bond yields actually declined because inflation moderated. This is not exactly the same scenario right now. One of the reasons I I turned more cautious in mid September is because of what's going on in The Middle East. Higher for longer oil prices means stickier inflation means that central banks are not in a one and done mode, but are in a tightening mode, and that in turn is pushing up bond yields. So I I I think that the the good and the bad news is that the repricing in the bond market is occurring pretty rapidly. It that that's hurts in the shorter shorter term, But, to the extent that we get to where the terminal rate is for the bond yield, that that will be helpful. We saw another high cover night down under in Australia. Ed, thank you, sir. Eddie Yardeni, if you had any research, central bank after central bank responding to this high yields worldwide. We often hear that, don't we? High yields all around the world with the exception of one notable very large economy, and that's China. Chinese yields actually year to date on government bonds have been lower, and this economy is different. This government is looking to subsidize things and get the economy moving again. The latest from the PPOC, China to subsidize interest payments for first time homebuyers, first home purchases. This is an important move from the Chinese. They're looking to stimulate growth. They have a very different problem over in China compared to the problem we talk about every single morning on this show.