A wave of unease has swept through global financial markets as yields on longer-dated U.S. Treasury bonds have broken through the 4.50% threshold, a level not seen since July 25th. The 30-year Treasury bond yield, a key indicator of long-term interest rates, has climbed steadily, driven by mounting concerns over the U.S. fiscal outlook and the potential for a resurgence of inflation. This upward surge follows a similar pattern in the 10-year U.S. Treasury yield, which has risen by a notable 63 basis points since the Federal Reserve’s meeting on September 18th, reaching 4.25%.
The stock market has responded with a broad sell-off, as investors grapple with the implications of rising borrowing costs. The iShares 20+ Year Treasury Bond ETF (TLT), which tracks the performance of long-term U.S. government bonds, has declined by an additional 0.3%, marking its fifth negative week in the past six and approaching a 10% drop from its mid-September highs. Wall Street, meanwhile, is facing its third consecutive day of declines, with the S&P 500, as represented by the S PDR S&P 500 ETF Trust (SPY), poised to end a six-week winning streak.
As the U.S. presidential election draws closer, investor apprehension is particularly centered around the potential for further expansionary fiscal policies. The fear is that these policies, if enacted, could exacerbate the already substantial federal budget deficit, fueling inflationary pressures and further increasing the burden of debt servicing.
Bond Vigilantes Sound the Alarm
Wall Street veteran investor Ed Yardeni has labeled the recent rise in bond yields as a vote of disapproval from the “Bond Vigilantes,” a term used to describe investors who demand higher yields to compensate for perceived risks. In a note released Wednesday, Yardeni suggests that the bond vigilantes are signaling their disapproval of Federal Reserve Chair Jerome Powell’s decision to implement a 50 basis point rate cut on September 18th. This move, seen by some as premature, has raised concerns that the Fed may be inadvertently fueling economic overheating.
While Yardeni maintains his forecast for bond yields to remain in the 4.00% to 4.50% range, he expresses caution about the Fed’s ability to effectively manage both growth and inflation risks in the near term. He believes the bond vigilantes may also be signaling their disapproval of Washington’s fiscal policies, regardless of which party wins the upcoming election. Yardeni highlights the mounting pressure on the next administration, which will face net interest outlays exceeding $1 trillion on the ballooning federal debt.
Macro Concerns: The U.S. Dollar and Budget Deficits
Otavio Costa, macro strategist at Crescat Capital, has expressed concerns about the long-term trajectory of the U.S. dollar. In a post on X (formerly Twitter), Costa references the “magazine cover curse” phenomenon, drawing attention to The Economist’s October cover depicting the U.S. dollar as a rocket soaring skyward—a symbolic representation of America’s economic dominance. Costa cautions that while the U.S. dollar may appear strong in the short term, the substantial share of GDP devoted to servicing debt (around 5%) could lead to a dollar depreciation against other fiat currencies over the next one to three years.
Adding to the growing concern, the International Monetary Fund (IMF) has released a more pessimistic fiscal forecast for the U.S. The IMF now expects the U.S. budget deficit to reach 7.6% of GDP in 2024, up from its previous April estimate of 6.5%. The outlook for 2025 has also deteriorated, with the deficit projected to hit 7.3% of GDP, slightly higher than the prior 7.1% forecast. The IMF emphasizes that the U.S. deficit will likely remain above 6% of GDP until at least 2029, driven by rising debt servicing costs and persistent fiscal imbalances. The IMF warns that both the U.S. and China face a “low probability” of stabilizing their debt levels by the end of the decade.
The recent surge in long-term Treasury yields, coupled with the warnings from experts and international institutions, signals a growing sense of unease regarding the U.S. fiscal outlook and the potential for a decline in the dollar’s dominance. As the world navigates a complex economic landscape, the coming months will be crucial in determining the path forward for the U.S. economy and its role in the global financial system.