Suburban moms, crypto bros, and Swifties aren’t the only voters making their presence felt this election season. Bond investors vote with their dollars in the financial markets, and they don’t like what they see.
The famous term “bond vigilantes” was coined in the 1980s by Wall Street veteran Ed Yardeni and referred to traders who protested massive deficits by selling bonds to raise interest rates.
In a note published Wednesday, Yardeni, chairman of Yardeni Research, and Eric Wallerstein, the firm’s chief market strategist, wrote that vigilantes are voting early and pointed out that 10-year Treasury yields have since risen 63 basis points to 4.25%. The Federal Reserve announced a half-point interest rate cut at its meeting last month.
“In the exit polls, the Bond Vigilantes say they are voting against Fed Chair Jerome Powell’s accommodative monetary policy because the economy is steaming and the Fed’s premature 50 basis point rate cut on September 18 increases the risk of interest rates overheating ” they said.
Treasury yields tumbled ahead of the first rate cut as investors looked for an aggressive easing cycle to match the aggressive tightening cycle. However, since the Fed meeting, they have initiated a major turnaround.
Sentiment has turned so much that some Wall Street forecasters have warned the central bank could even pause on further cuts. That’s because Fed officials and economic data have dampened optimism about much easing.
In their note, Yardeni and Wallerstein also attributed the recent market moves to the outlook for federal deficits, which have ballooned recently, reaching $950 billion in the budget year ended September 30, up 35% from the previous year, mainly due to higher interest rates.
“The League Vigilantes could also vote against Washington, under the assumption that regardless of which party wins the White House and Congress, fiscal policy will increase the federal government’s already bloated budget deficit and fuel inflation,” they explained out. “The next administration will face net interest costs of more than $1 trillion on the rapidly rising federal debt.”
Budget watchdogs have warned about the exploding federal deficit. Although it will expand under Donald Trump or Kamala Harris, the Penn Wharton Budget Model and the Committee for a Responsible Federal Budget have said Trump’s policies would create a much deeper hole.
That’s as the former president teased a series of tax cuts and even abolished income taxes altogether. Meanwhile, his pledge to raise rates across the board is also widely seen as inflationary, as companies typically pass on the extra costs to consumers in the form of higher prices.
As Trump continues to improve in the polls, his policies, which are expected to fuel inflation and widen deficits, are increasingly priced in the bond market, which is seeing more upward pressure on Fed rates and yields as a flood of new government bonds will cause investors to make higher demands. returns.
In addition to the spike in Treasury yields, Yardeni and Wallerstein highlighted other developments in financial markets, including higher federal funds futures, rising inflation expectations via the 10-year TIPS rate, the stronger dollar and the 33% rise in gold since the beginning of the year. .
Gold has emerged as an attractive hedge against rising inflation, loose fiscal policy and geopolitical instability.
“Investors are purchasing precious metals to protect their portfolios against all of the above risks,” they wrote. “The foreign central banks of the Axis of Evil are building up their gold reserves to avoid potential financial sanctions in the future.”
While the bond watchdogs seemed to be inactive for years, mainly as the Fed kept rates low, Yardeni said last year they were back and “re-saddled” with federal deficits on their agenda.
Despite Wall Street heavyweights like JPMorgan CEO Jamie Dimon sounding the alarm about America’s deficits and debt, neither Trump nor Harris have made it a priority on the campaign trail. That could give the bond vigilantes a bigger voice in the issue.
The perceived power of bond vigilantes was famously illustrated in the early 1990s, when U.S. yields rose as investors dumped government bonds amid fears of federal deficits in what became known as the Great Bond Massacre.
James Carville, then an adviser to President Bill Clinton, mused that he would like to be reincarnated as the bond market: “You can intimidate anyone.”
This story originally appeared on Fortune.com
